Negative equity and foreclosure: Theory and evidence

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. Millions of Americans have negative housing equity, meaning that the outstanding balance on their mortgage exceeds their home's current market value. Our data show that the overwhelming majority of these households will not lose their homes. Our finding is consistent with historical evidence: we examine more than 100,000 homeowners in Massachusetts who had negative equity during the early 1990s and find that fewer than 10 percent of these owners eventually lost their home to foreclosure. This result is also, contrary to popular belief, completely consistent with economic theory, which predicts that from the borrower's perspective, negative equity is a necessary but not a sufficient condition for foreclosure. Our findings imply that lenders and policymakers face a serious information problem in trying to help borrowers with negative equity, because it is difficult to determine which borrowers actually require help in order to prevent the loss of their homes to foreclosure. Terms of use: Documents in EconStor may

Can Islamic injunctions indemnify the structural flaws of securitized debt?

“…That is, the terminal project payoffs exceed the balance of the credit facility over its tenure (in all states of the economy) with very high probability (see Figure 2). The criticality of ensuring the payoffs from depreciating to a substantial negative equity value over the tenure of the credit facility is consistent with Foote et al (2008), and Archer and Smith (2013), who observe non-linearity in the put option to default.…”

“…That is, strategic default involves the borrower expectation of future asset prices and pecuniary [non-pecuniary] costs (e.g. income capability, effect on borrower credit score) substantially exceeding the benefits of continuing with the debt repayments (Foote et al, 2008;Archer and Smith, 2013).…”

“…The debt pricing mechanism here is consistent with Baltensperger (1978) who advocates incorporation of not only the mark-up rate but also the debt-to-value ratio and the tenure of the facility. Foote et al (2008) and Archer and Smith (2013) extend the analysis by including borrower's income factors. 24 This meticulous pricing of debt involves a more scientific approach and is in contrast to ad hoc credit rationing practices and overall loan loss rehabilitation programs observed in industry (Foote et al, 2008).…”

Современные Возможности Оценки Кредитного Риска При Ипотечном Жилищном Кредитовании

“…Первая попытка эмпирически протестировать валидность данных теорий при моделировании вероятности ипотечного дефолта американских заемщиков была предпринята Джексоном и Кассерманом [15]. Более поздние исследования, в основном по американскому ипотечному рынку, не оставляли попыток тестирования данных теорий [7,9,13,17] и позволили заключить о целесообразности использования обоих теорий для моделирования вероятности ипотечного дефолта. В эмпирической литературе находит подтверждение зависимость вероятности ипотечного дефолта от социально-демографических характеристик заемщиков, включая их уровень финансовой грамотности, параметров ипотечного кредита и макроэкономических показателей.…”

Are American homeowners locked into their houses? The impact of housing market conditions on state-to-state migration

“…12 On the other hand, while many households may want to avoid defaulting on their mortgage, at increasingly higher rates of negative equity, the costs of default might appear more reasonable as there is a lower likelihood that prices will rise enough to cover the debt (Guiso, Sapienza, and Zingales 2011). This is especially true for households that have also suffered an income shock (due to job loss, adverse medical events, death, or divorce), resulting in the so-8 called double-trigger effect (Foote, Gerardi, and Willen 2008). Yet even without any adverse event taking place, there does appear to be a certain threshold at which people are willing to walk away from their homes, even if they can afford their monthly mortgage payment-a tactic known as "strategic default."…”