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Mortgage Default during the U.S. Mortgage Crisis

  • Thomas Schelkle

Which of the main competing theories of mortgage default can quantitatively explain the rise in default rates during the U.S. mortgage crisis? This paper finds that the double-trigger hypothesis attributing mortgage default to the joint occurrence of negative equity and a life event like unemployment is consistent with the evidence. In contrast a traditional frictionless default model predicts a too strong increase in default rates. The paper also provides micro-foundations for double-trigger behavior in a model where unemployment may cause liquidity problems for the borrower. Using this framework for policy analysis reveals that a mortgage crisis may be mitigated at a lower cost by relieving the liquidity problems of borrowers instead of bailing out lenders.

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File URL: http://ockenfels.uni-koeln.de/fileadmin/wiso_fak/stawi-ockenfels/pdf/wp_series_download/wp0072.pdf
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Paper provided by University of Cologne, Department of Economics in its series Working Paper Series in Economics with number 72.

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Date of creation: 16 May 2014
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Handle: RePEc:kls:series:0072
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