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Mortgage defaults

  • Juan Carlos Hatchondo
  • Leonardo Martinez
  • Juan M. Sanchez

We incorporate house price risk and mortgages into a standard incomplete market (SIM) model. We calibrate the model to match U.S. data, and we show that the model also accounts for non-targeted features of the data such as the distribution of down payments, the life-cycle prole of homeownership, and the mortgage default rate. In addition, we show that the average coefficients that measure the agents' ability to self-insure against income shocks are similar to those of a SIM model without housing (as presented by Kaplan and Violante, 2010). However, incorporating housing increases the values of these coefficients for younger agents, which narrows the gap between the SIM model's implications and the data. The response of consumption to house price shocks is minimal. We also study the effects of default prevention policies. Introducing a minimum down payment requirement of 15 percent reduces defaults on mortgages by 30 percent, reduces the homeownership rate up to only 0.2 percentage points (if the aggregate house price level does not adjust), and may cause house prices to decline up to 0.7 percent (if homeownership does not adjust). Garnishing defaulters' income in excess of 43 percent of median consumption for one year produces a similar decline in defaults; but, since it reduces the median equilibrium down payment from 19 percent to 9 percent, it boosts homeownership up to 4.3 percentage points (if the aggregate house price level does not adjust) and may increase house prices up to 16.1 percent (if homeownership does not adjust). The introduction of minimum down payments or income garnishment benefit a majority of the population.

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Paper provided by Federal Reserve Bank of Richmond in its series Working Paper with number 11-05.

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Date of creation: 2011
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Handle: RePEc:fip:fedrwp:11-05
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  1. Dirk Krueger, 2012. "Housing and the Macroeconomy: The Role of Bailout Guarantees for Government Sponsored Enterprises," 2012 Meeting Papers 102, Society for Economic Dynamics.
  2. Borys Grochulski, 2010. "Optimal Personal Bankruptcy Design under Moral Hazard," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 13(2), pages 350-378, April.
  3. Juan Carlos Hatchondo & Leonardo Martinez & Horacio Sapriza, 2010. "Quantitative properties of sovereign default models: solution methods," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 13(4), pages 919-933, October.
  4. Yongheng Deng & John M. Quigley & Robert Van Order, . "Mortgage Terminations, Heterogeneity and the Exercise of Mortgage Options," Zell/Lurie Center Working Papers 322, Wharton School Samuel Zell and Robert Lurie Real Estate Center, University of Pennsylvania.
  5. Stefano Corradin & José L. Fillat & Carles Vergara-Alert, 2010. "Optimal portfolio choice with predictability in house prices and transaction costs," Risk and Policy Analysis Unit Working Paper QAU10-2, Federal Reserve Bank of Boston.
  6. Mark A. Aguiar & Mark Bils, 2011. "Has Consumption Inequality Mirrored Income Inequality?," NBER Working Papers 16807, National Bureau of Economic Research, Inc.
  7. John Y. Campbell & Joao F. Cocco, 2002. "Household Risk Management and Optimal Mortgage Choice," Harvard Institute of Economic Research Working Papers 1946, Harvard - Institute of Economic Research.
  8. Matthew Chambers & Carlos Garriga & Don E. Schlagenhauf, 2009. "Accounting For Changes In The Homeownership Rate," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 50(3), pages 677-726, 08.
  9. Kartik Athreya, 2004. "Fresh start or head start? Uniform bankruptcy exemptions and welfare," Working Paper 03-03, Federal Reserve Bank of Richmond.
  10. Richard Blundell & Luigi Pistaferri & Ian Preston, 2004. "Consumption inequality and partial insurance," IFS Working Papers W04/28, Institute for Fiscal Studies.
  11. Satyajit Chatterjee & Dean Corbae & Makoto Nakajima & José-Víctor Ríos-Rull, 2007. "A Quantitative Theory of Unsecured Consumer Credit with Risk of Default," Econometrica, Econometric Society, vol. 75(6), pages 1525-1589, November.
  12. Juan Carlos Hatchondo & Leonardo Martinez & Horacio Sapriza, 2010. "Quantitative properties of sovereign default models: solution methods matter," Working Paper 10-04, Federal Reserve Bank of Richmond.
  13. Terry, Stephen J. & Knotek II, Edward S., 2011. "Markov-chain approximations of vector autoregressions: Application of general multivariate-normal integration techniques," Economics Letters, Elsevier, vol. 110(1), pages 4-6, January.
  14. Patrick Bolton & Olivier Jeanne, 2005. "Structuring and Restructuring Sovereign Debt: The Role of Seniority," NBER Working Papers 11071, National Bureau of Economic Research, Inc.
  15. Greg Kaplan & Giovanni L. Violante, 2009. "How Much Consumption Insurance Beyond Self-Insurance?," NBER Working Papers 15553, National Bureau of Economic Research, Inc.
  16. 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.
  17. Huggett, Mark, 1996. "Wealth distribution in life-cycle economies," Journal of Monetary Economics, Elsevier, vol. 38(3), pages 469-494, December.
  18. Bulent Guler, . "Innovations in Information Technology and the Mortgage Market," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics.
  19. Anthony Pennington-Cross, 2004. "The value of foreclosed property," Working Papers 2004-022, Federal Reserve Bank of St. Louis.
  20. Andra C. Ghent & Marianna Kudlyak, 2011. "Recourse and Residential Mortgage Default: Evidence from US States 1," Review of Financial Studies, Society for Financial Studies, vol. 24(9), pages 3139-3186.
  21. Joseph Gruber & Robert Martin, 2003. "Precautionary savings and the wealth distribution with illiquid durables," International Finance Discussion Papers 773, Board of Governors of the Federal Reserve System (U.S.).
  22. Athreya, Kartik B., 2002. "Welfare implications of the Bankruptcy Reform Act of 1999," Journal of Monetary Economics, Elsevier, vol. 49(8), pages 1567-1595, November.
  23. Christopher D. Carroll & Misuzu Otsuka & Jiri Slacalek, 2011. "How Large Are Housing and Financial Wealth Effects? A New Approach," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 43(1), pages 55-79, 02.
  24. Patrick Bajari & Chenghuan Sean Chu & Minjung Park, 2008. "An Empirical Model of Subprime Mortgage Default From 2000 to 2007," NBER Working Papers 14625, National Bureau of Economic Research, Inc.
  25. Huggett, Mark, 1993. "The risk-free rate in heterogeneous-agent incomplete-insurance economies," Journal of Economic Dynamics and Control, Elsevier, vol. 17(5-6), pages 953-969.
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