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Foreclosure delay and U.S. unemployment

  • Kyle F. Herkenhoff
  • Lee Ohanian

Through a purely positive lens, we study and document the growing trend of mortgagors who skip mortgage payments as an extra source of "informal" unemployment insurance during the 2007 recession and the subsequent recovery. In a dynamic model, we capture this behavior by treating both delinquency and foreclosure not as one period events, but rather as protracted and potentially reversible episodes that influence job search behavior and wage acceptance decisions. With a relatively conservative parameterization, we find that the observed foreclosure delays increase the unemployment rate by an additional 1/3%-1/2% and increase the stock of delinquent loans by 8%-12%. When interpreted as an implicit line of credit, those that use their mortgage as “informal" unemployment insurance borrow at a real rate of at least 18%.>

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File URL: http://research.stlouisfed.org/wp/2012/2012-017.pdf
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Paper provided by Federal Reserve Bank of St. Louis in its series Working Papers with number 2012-017.

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Date of creation: 2012
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Handle: RePEc:fip:fedlwp:2012-017
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  1. Manuel Adelino & Kristopher Gerardi & Paul S. Willen, 2009. "Why don't lenders renegotiate more home mortgages? redefaults, self-cures, and securitization," Working Paper 2009-17, Federal Reserve Bank of Atlanta.
  2. Krueger, Alan B. & Mueller, Andreas I., 2008. "Job Search and Unemployment Insurance: New Evidence from Time Use Data," IZA Discussion Papers 3667, Institute for the Study of Labor (IZA).
  3. Satyajit Chatterjee & Burcu Eyigungor, 2011. "A quantitative analysis of the U.S. housing and mortgage markets and the foreclosure crisis," Working Papers 11-26, Federal Reserve Bank of Philadelphia.
  4. Leonardo Martinez & Juan Carlos Hatchondo & Juan M. Sanchez, 2012. "Mortgage Defaults," IMF Working Papers 12/26, International Monetary Fund.
  5. David Benjamin, 2008. "Recovery Before Redemption," 2008 Meeting Papers 531, Society for Economic Dynamics.
  6. David Benjamin & Mark L. J. Wright, 2009. "Recovery Before Redemption: A Theory Of Delays In Sovereign Debt Renegotiations," CAMA Working Papers 2009-15, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
  7. Chatterjee, Satyajit & Eyigungor, Burcu, 2009. "Foreclosures and house price dynamics: a quantitative analysis of the mortgage crisis and the foreclosure prevention policy," Working Papers 09-22, Federal Reserve Bank of Philadelphia.
  8. Xavier Mateos-Planas & David Benjamin, 2012. "Formal vs. Informal Default in Consumer Credit," 2012 Meeting Papers 144, Society for Economic Dynamics.
  9. Stijn Van Nieuwerburgh & Pierre-Olivier Weill, 2010. "Why Has House Price Dispersion Gone Up?," Review of Economic Studies, Oxford University Press, vol. 77(4), pages 1567-1606.
  10. Casey B. Mulligan, 2008. "A Depressing Scenario: Mortgage Debt Becomes Unemployment Insurance," NBER Working Papers 14514, National Bureau of Economic Research, Inc.
  11. Ambrose, Brent W & Buttimer, Richard J, Jr & Capone, Charles A, 1997. "Pricing Mortgage Default and Foreclosure Delay," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 29(3), pages 314-25, August.
  12. Casey B. Mulligan, 2011. "Means-Tested Subsidies and Economic Performance Since 2007," NBER Working Papers 17445, National Bureau of Economic Research, Inc.
  13. Satyajit Chatterjee, 2010. "An Equilibrium Model of the Timing of Bankruptcy Filings," 2010 Meeting Papers 1282, Society for Economic Dynamics.
  14. David Benjamin & Mark L. J. Wright, 2009. "Recovery Before Redemption: A Theory Of Delays In Sovereign Debt Renegotiations," CAMA Working Papers 2009-15, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
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