Can’t Pay or Won’t Pay? Unemployment, Negative Equity, and Strategic Default

Abstract

Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Prior research has found that job loss, as proxied for by regional unemployment rates, is a weak predictor of mortgage default. In contrast, using micro data from the PSID, this paper finds that job loss and adverse financial shocks are important determinants of mortgage default. Households with an unemployed head are approximately three times as likely to default as households with an employed head. Similarly, households that experience divorce, report large outstanding medical expenses, or have had any other severe income loss are much more likely to default. While household-level employment and financial shocks are important drivers of mortgage default, our analysis shows that the vast majority of financially distressed households do not default. More than 80 percent of unemployed households with less than one month of mortgage payments in savings are current on their payments. We argue that this has important implications for theoretical models of mortgage default as well as for loss mitigation policies. Finally, this paper provides some of the first direct evidence on the extent of strategic default. Wealth data suggest a limited scope for strategic default, with only one-third of underwater defaulters having enough liquid assets to cover one month's mortgage payment. Terms of use: Documents in

Consumer Ruthlessness and Mortgage Default during the 2007 to 2009 Housing Bust

“…In particular, they find that some Countrywide borrowers defaulted to become eligible for a mortgage modification program, and would not have defaulted in the absence of the modification program. 5 Consistent with our findings,Gerardi et al (2015) identify very few strategic defaulters in their data, and also note that the majority of financially distressed and underwater homeowners continue to make mortgage payments.6 Senator Charles Grassley (R-Iowa) quoted in Donald Bartlett and James Steele, "Soaked by Congress," in Time magazine on May 7, 2000.…”

“…First, the severe recession beginning in 2007 led to substantial income losses across a large number of households. Indeed, recent research finds a strong connection between job loss and default (Hsu, Matsa, and Melzer (2014), Gerardi et al (2015), Tian, Quercia, and Riley (2016)). 5 Second, the sharp rise in nonprime lending during the mid-2000s, which includes loans without income verification or any down payment, likely means that a substantial fraction of borrowers were financially unstable even at origination.…”

Mortgage Default during the U.S. Mortgage Crisis

“…et al (2010) provide evidence that variables measuring illiquidity and interactions between illiquidity and negative equity significantly affect default. Gerardi et al (2018) show that at the individual level, unemployment and income shocks increase the probability of default. My paper is motivated by these prior empirical results.…”

“…Foote and Willen (2018) provide a survey of this recent literature. Examples of this empirical research include Amromin andPaulson (2009), Bajari, Chu, andPark (2010), Bhutta, Dokko, and Shan (2017), Demyanyk andVan Hemert (2011), Elul et al (2010), Ferreira and Gyourko (2015), , Foote et al (2009), Foote, Gerardi, and, Fuster and Willen (2017), Gerardi et al (2018), Gerardi et al (2009), Gerardi, Shapiro, andWillen (2007), Ghent andKudlyak (2011), Guiso, Sapienza, andZingales (2013), Jagtiani and Lang (2011), Mayer, Pence, and Sherlund (2009), Mian and Sufi (2009), Palmer (2013, and Stanton andWallace (2011), among others. et al (2010) provide evidence that variables measuring illiquidity and interactions between illiquidity and negative equity significantly affect default.…”

Unemployment Insurance as a Housing Market Stabilizer

“…10 We account for the nonlinear effect of mortgage leverage on delinquency risk by including an indicator for negative home equity in addition to a linear control for the mortgage loan-to-value ratio (winsorized at the ninety-ninth percentile). We also interact Layoff with these mortgage variables to account for the heightened impact of affordability among households with high leverage (Elul et al 2010;Gerardi et al forthcoming;Campbell and Cocco 2015).…”