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

Kristopher Gerardi, Kyle F. Herkenhoff, Lee E. Ohanian, Paul S. Willen
2017 The Review of financial studies  
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more » ... von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Abstract: 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. 10 The control set includes a complete set of race dummies, a gender dummy, a marriage dummy, dummies for educational levels, dummies for whether the state allows lender recourse and judicial foreclosure, and an indicator for whether the household lives in AZ, CA, FL, or NV, the states that experienced the largest house price declines and worst foreclosure problems. In addition, we add variables that measure state-level house price growth in the year prior to the survey and the change in the state unemployment rate over the same period. We also include controls for mortgage characteristics, which include the type of mortgage (adjustable rate vs. fixed rate), the interest rate, the remaining term, the presence of a second mortgage, and whether or not the mortgage is a refinance of a previous loan. the Enterprises Efforts to Recover Losses from Foreclosure Sales." Audit Report: AUD-2013-001 .
doi:10.1093/rfs/hhx115 fatcat:ybrgodsie5corjzqhecszh673m