IDEAS home Printed from https://ideas.repec.org/p/nbr/nberwo/18880.html
   My bibliography  Save this paper

Unemloyment and Unobserved Credit Risk in the FHA Single Family Mortgage Insurance Fund

Author

Listed:
  • Joseph Gyourko
  • Joseph Tracy

Abstract

Empirical models of mortgage default typically find that the influence of unemployment is negligible compared to other well known risk factors such as high borrower leverage or low borrower FICO scores. This is at odds with theory, which assigns a critical role to unemployment status in the decision to stop payment on a mortgage. We help reconcile this divergence by employing a novel empirical strategy involving simulated unemployment histories to measure the severity of attenuation bias in loan-level estimations of default risk due to a borrower becoming unemployed. Attenuation bias results because individual data on unemployment status is unobserved, requiring that a market-wide unemployment rate be used as a proxy. Attenuation is extreme, with our results suggesting that the use of an aggregate unemployment rate in lieu of actual borrower unemployment status results in default risk from a borrower becoming unemployed being underestimated by a factor of 100 or more. Correcting for this indicates unemployment is more powerful than other well-known factors such as extremely high leverage or extremely low FICO scores in predicting individual borrower default. Our simulated data indicate that adding the unemployment rate as a proxy for the missing borrower-specific unemployment indicator does not improve the accuracy of the estimated model over the specification without the proxy variable included.

Suggested Citation

  • Joseph Gyourko & Joseph Tracy, 2013. "Unemloyment and Unobserved Credit Risk in the FHA Single Family Mortgage Insurance Fund," NBER Working Papers 18880, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:18880
    Note: PE
    as

    Download full text from publisher

    File URL: http://www.nber.org/papers/w18880.pdf
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Christopher Foote & Kristopher Gerardi & Lorenz Goette & Paul Willen, 2010. "Reducing Foreclosures: No Easy Answers," NBER Chapters, in: NBER Macroeconomics Annual 2009, Volume 24, pages 89-138, National Bureau of Economic Research, Inc.
    2. repec:aei:rpaper:32621 is not listed on IDEAS
    3. Caplin, Andrew & Freeman, Charles & Tracy, Joseph, 1997. "Collateral Damage: Refinancing Constraints and Regional Recessions," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 29(4), pages 496-516, November.
    4. Andrew Caplin & Anna Cororaton & Joseph Tracy, 2015. "Is the FHA Creating Sustainable Homeownership?," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 43(4), pages 957-992, November.
    5. Andra C. Ghent & Marianna Kudlyak, 2010. "Recourse and residential mortgage default: theory and evidence from U.S. states," Working Paper 09-10, Federal Reserve Bank of Richmond.
    6. Ronel Elul & Nicholas S. Souleles & Souphala Chomsisengphet & Dennis Glennon & Robert Hunt, 2010. "What "Triggers" Mortgage Default?," American Economic Review, American Economic Association, vol. 100(2), pages 490-494, May.
    7. Yongheng Deng & John M. Quigley & Robert Van Order, 2000. "Mortgage Terminations, Heterogeneity and the Exercise of Mortgage Options," Econometrica, Econometric Society, vol. 68(2), pages 275-308, March.
    8. Fernando Ferreira & Joseph Gyourko & Joseph Tracy, 2012. "Housing busts and household mobility: an update," Economic Policy Review, Federal Reserve Bank of New York, vol. 18(Nov), pages 1-15.
    9. Ferreira, Fernando & Gyourko, Joseph & Tracy, Joseph, 2010. "Housing busts and household mobility," Journal of Urban Economics, Elsevier, vol. 68(1), pages 34-45, July.
    10. Foote, Christopher L. & Gerardi, Kristopher & Willen, Paul S., 2008. "Negative equity and foreclosure: Theory and evidence," Journal of Urban Economics, Elsevier, vol. 64(2), pages 234-245, September.
    11. Kau James B. & Keenan Donald C. & Kim Taewon, 1994. "Default Probabilities for Mortgages," Journal of Urban Economics, Elsevier, vol. 35(3), pages 278-296, May.
    12. Michael G. Bradley & Amy Crews Cutts & Wei Liu, 2015. "Strategic Mortgage Default: The Effect of Neighborhood Factors," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 43(2), pages 271-299, June.
    13. Diego Aragon & Andrew Caplin & Sumit Chopra & John V. Leahy & Yann LeCun & Marco Scoffier & Joseph Tracy, 2010. "Reassessing FHA Risk," NBER Working Papers 15802, National Bureau of Economic Research, Inc.
    14. Moulton, Brent R, 1990. "An Illustration of a Pitfall in Estimating the Effects of Aggregate Variables on Micro Unit," The Review of Economics and Statistics, MIT Press, vol. 72(2), pages 334-338, May.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. W. Scott Frame & Kristopher S. Gerardi & Paul S. Willen, 2015. "The Failure of supervisory stress testing: Fannie Mae, Freddie Mac, and OFHEO," Working Papers 15-4, Federal Reserve Bank of Boston.
    2. Anthony A. Defusco & John Mondragon, 2020. "No Job, No Money, No Refi: Frictions to Refinancing in a Recession," Journal of Finance, American Finance Association, vol. 75(5), pages 2327-2376, October.
    3. Patrick Bayer & Fernando Ferreira & Stephen L. Ross, 2016. "The Vulnerability of Minority Homeowners in the Housing Boom and Bust," American Economic Journal: Economic Policy, American Economic Association, vol. 8(1), pages 1-27, February.
    4. Dettling, Lisa J. & Hsu, Joanne W., 2018. "Returning to the nest: Debt and parental co-residence among young adults," Labour Economics, Elsevier, vol. 54(C), pages 225-236.
    5. Kristopher Gerardi & Kyle F. Herkenhoff & Lee E. Ohanian & Paul S. Willen, 2018. "Can’t Pay or Won’t Pay? Unemployment, Negative Equity, and Strategic Default," Review of Financial Studies, Society for Financial Studies, vol. 31(3), pages 1098-1131.
    6. Matthew Read & Chris Stewart & Gianni La Cava, 2014. "Mortgage-related Financial Difficulties: Evidence from Australian Micro-level Data," RBA Research Discussion Papers rdp2014-13, Reserve Bank of Australia.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Gyourko, Joseph & Tracy, Joseph, 2014. "Reconciling theory and empirics on the role of unemployment in mortgage default," Journal of Urban Economics, Elsevier, vol. 80(C), pages 87-96.
    2. Neil Bhutta & Jane K. Dokko & Hui Shan, 2010. "The depth of negative equity and mortgage default decisions," Finance and Economics Discussion Series 2010-35, Board of Governors of the Federal Reserve System (U.S.).
    3. John P. Harding & Jing Li & Stuart S. Rosenthal & Xirui Zhang, 2022. "Forced moves and home maintenance: The amplifying effects of mortgage payment burden on underwater homeowners," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 50(2), pages 498-533, June.
    4. Goodstein, Ryan & Hanouna, Paul & Ramirez, Carlos D. & Stahel, Christof W., 2017. "Contagion effects in strategic mortgage defaults," Journal of Financial Intermediation, Elsevier, vol. 30(C), pages 50-60.
    5. Steven Laufer, 2018. "Equity Extraction and Mortgage Default," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 28, pages 1-33, April.
    6. Khandani, Amir E. & Lo, Andrew W. & Merton, Robert C., 2013. "Systemic risk and the refinancing ratchet effect," Journal of Financial Economics, Elsevier, vol. 108(1), pages 29-45.
    7. Haughwout, Andrew & Peach, Richard & Tracy, Joseph, 2008. "Juvenile delinquent mortgages: Bad credit or bad economy?," Journal of Urban Economics, Elsevier, vol. 64(2), pages 246-257, September.
    8. Francesca Castelli & Damien Moore & Gabriel Ehrlich & Jeffrey Perry, 2014. "Modeling the Budgetary Costs of FHA's Single Family Mortgage Insurance: Working Paper 2014-05," Working Papers 45711, Congressional Budget Office.
    9. Andersson, Fredrik & Mayock, Tom, 2014. "How does home equity affect mobility?," Journal of Urban Economics, Elsevier, vol. 84(C), pages 23-39.
    10. Guiso, Luigi & Sodini, Paolo, 2013. "Household Finance: An Emerging Field," Handbook of the Economics of Finance, in: G.M. Constantinides & M. Harris & R. M. Stulz (ed.), Handbook of the Economics of Finance, volume 2, chapter 0, pages 1397-1532, Elsevier.
    11. Andreas Fuster & Benedict Guttman-Kenney & Andrew F. Haughwout, 2018. "Tracking and stress-testing U.S. household leverage," Economic Policy Review, Federal Reserve Bank of New York, issue 24-1, pages 35-63.
    12. Lee, Yongwoong & Rösch, Daniel & Scheule, Harald, 2021. "Systematic credit risk in securitised mortgage portfolios," Journal of Banking & Finance, Elsevier, vol. 122(C).
    13. Chan, Sewin & Gedal, Michael & Been, Vicki & Haughwout, Andrew, 2013. "The role of neighborhood characteristics in mortgage default risk: Evidence from New York City," Journal of Housing Economics, Elsevier, vol. 22(2), pages 100-118.
    14. Chris Cunningham & Kristopher S. Gerardi & Yannan Shen, 2017. "Fracking and Mortgage Default," FRB Atlanta Working Paper 2017-4, Federal Reserve Bank of Atlanta.
    15. Ryan M. Goodstein, 2014. "Refinancing Trends among Lower Income and Minority Homeowners during the Housing Boom and Bust," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 42(3), pages 690-723, September.
    16. Chris Cunningham & Robert R. Reed, 2012. "Housing wealth and wage bargaining," FRB Atlanta Working Paper 2012-20, Federal Reserve Bank of Atlanta.
    17. Thomas Schelkle, 2018. "Mortgage Default during the U.S. Mortgage Crisis," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 50(6), pages 1101-1137, September.
    18. Andrew Caplin & Anna Cororaton & Joseph Tracy, 2015. "Is the FHA Creating Sustainable Homeownership?," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 43(4), pages 957-992, November.
    19. Pavan, Marina & Barreda-Tarrazona, Iván, 2020. "Should I default on my mortgage even if I can pay? Experimental evidence," Journal of Economic Dynamics and Control, Elsevier, vol. 110(C).
    20. Reamonn Lyndon & Yvonne McCarthy, 2013. "What Lies Beneath? Understanding Recent Trends in Irish Mortgage Arrears," The Economic and Social Review, Economic and Social Studies, vol. 44(1), pages 117-150.

    More about this item

    JEL classification:

    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation
    • R48 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Transportation Economics - - - Government Pricing and Policy

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:nbr:nberwo:18880. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: . General contact details of provider: https://edirc.repec.org/data/nberrus.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (email available below). General contact details of provider: https://edirc.repec.org/data/nberrus.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.