Nothing Special   »   [go: up one dir, main page]
IDEAS home Printed from https://ideas.repec.org/p/fip/fedgfe/2013-30.html
   My bibliography  Save this paper

Equity extraction and mortgage default

Author

Listed:
  • Steven Laufer
Abstract
Using a property-level data set of houses in Los Angeles County, I estimate that 30% of the recent surge in mortgage defaults is attributable to early home-buyers who would not have defaulted had they not borrowed against the rising value of their homes during the boom. I develop and estimate a structural model capable of explaining the patterns of both equity extraction and default observed among this group of homeowners. In the model, most of these defaults are attributable to the high loan-to-value ratios generated by this additional borrowing combined with the expectation that house prices would continue to decline. Only 30% are the result of income shocks and liquidity constraints. I use this model to analyze a policy that limits the maximum size of cash-out refinances to 80% of the current house value. I find that this restriction would reduce house prices by 14% and defaults by 28%. Despite the reduced borrowing opportunities, the welfare gain from this policy for new homeowners is equivalent to 3.2% of consumption because of their ability to purchase houses at lower prices.

Suggested Citation

  • Steven Laufer, 2013. "Equity extraction and mortgage default," Finance and Economics Discussion Series 2013-30, Board of Governors of the Federal Reserve System (U.S.).
    • Handle: RePEc:fip:fedgfe:2013-30
    as

    Download full text from publisher

    File URL: http://www.federalreserve.gov/pubs/feds/2013/201330/201330abs.html
    Download Restriction: no
    File URL: http://www.federalreserve.gov/pubs/feds/2013/201330/201330pap.pdf
    Download Restriction: no
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. Jonathan Heathcote & Fabrizio Perri & Giovanni L. Violante, 2010. "Unequal We Stand: An Empirical Analysis of Economic Inequality in the United States: 1967-2006," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 13(1), pages 15-51, January.
    2. John Kennan & James R. Walker, 2011. "The Effect of Expected Income on Individual Migration Decisions," Econometrica, Econometric Society, vol. 79(1), pages 211-251, January.
    3. Jack Favilukis & Sydney C. Ludvigson & Stijn Van Nieuwerburgh, 2017. "The Macroeconomic Effects of Housing Wealth, Housing Finance, and Limited Risk Sharing in General Equilibrium," Journal of Political Economy, University of Chicago Press, vol. 125(1), pages 140-223.
    4. Krueger, Dirk & Jeske, Karsten & Mitman, Kurt, 2011. "Housing and the Macroeconomy: The Role of Bailout Guarantees for Government Sponsored Enterprises," CEPR Discussion Papers 8624, C.E.P.R. Discussion Papers.
    5. Alan Greenspan & James Kennedy, 2008. "Sources and uses of equity extracted from homes," Oxford Review of Economic Policy, Oxford University Press and Oxford Review of Economic Policy Limited, vol. 24(1), pages 120-144, spring.
    6. John Y. Campbell & João F. Cocco, 2003. "Household Risk Management and Optimal Mortgage Choice," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 118(4), pages 1449-1494.
    7. Koijen, Ralph S.J. & Hemert, Otto Van & Nieuwerburgh, Stijn Van, 2009. "Mortgage timing," Journal of Financial Economics, Elsevier, vol. 93(2), pages 292-324, August.
    8. 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.
    9. Wenli Li & Michelle J. White, 2009. "Mortgage Default, Foreclosure, and Bankruptcy," NBER Working Papers 15472, National Bureau of Economic Research, Inc.
    10. Kurt Mitman, 2016. "Macroeconomic Effects of Bankruptcy and Foreclosure Policies," American Economic Review, American Economic Association, vol. 106(8), pages 2219-2255, August.
    11. Satyajit Chatterjee & Dean Corbae & Makoto Nakajima & José-Víctor Ríos-Rull, 2007. "A Quantitative Theory of Unsecured Consumer Credit with Risk of Default," Econometrica, Econometric Society, vol. 75(6), pages 1525-1589, November.
    12. Wenli Li & Haiyong Liu & Fang Yang & Rui Yao, 2016. "Housing Over Time And Over The Life Cycle: A Structural Estimation," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 57, pages 1237-1260, November.
    13. Terrence Clauretie & Nasser Daneshvary, 2011. "The Optimal Choice for Lenders Facing Defaults: Short Sale, Foreclose, or REO," The Journal of Real Estate Finance and Economics, Springer, vol. 42(4), pages 504-521, May.
    14. Foote, Christopher L. & Gerardi, Kristopher & Goette, Lorenz & Willen, Paul S., 2008. "Just the facts: An initial analysis of subprime's role in the housing crisis," Journal of Housing Economics, Elsevier, vol. 17(4), pages 291-305, December.
    15. 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.).
    16. 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.
    17. Satyajit Chatterjee & Burcu Eyigungor, 2015. "A Quantitative Analysis of the US Housing and Mortgage Markets and the Foreclosure Crisis," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 18(2), pages 165-184, April.
    18. John Y. Campbell & João F. Cocco, 2015. "A Model of Mortgage Default," Journal of Finance, American Finance Association, vol. 70(4), pages 1495-1554, August.
    19. Joao F. Cocco, 2005. "Portfolio Choice in the Presence of Housing," The Review of Financial Studies, Society for Financial Studies, vol. 18(2), pages 535-567.
    20. Joao F. Cocco, 2005. "Consumption and Portfolio Choice over the Life Cycle," The Review of Financial Studies, Society for Financial Studies, vol. 18(2), pages 491-533.
    21. Atif Mian & Amir Sufi, 2011. "House Prices, Home Equity-Based Borrowing, and the US Household Leverage Crisis," American Economic Review, American Economic Association, vol. 101(5), pages 2132-2156, August.
    22. Kristopher Gerardi & Adam Hale Shapiro & Paul S. Willen, 2007. "Subprime outcomes: risky mortgages, homeownership experiences, and foreclosures," Working Papers 07-15, Federal Reserve Bank of Boston.
    23. Hurst, Erik & Stafford, Frank, 2004. "Home Is Where the Equity Is: Mortgage Refinancing and Household Consumption," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 36(6), pages 985-1014, December.
    24. Jack Favilukis & David Kohn & Sydney C. Ludvigson & Stijn Van Nieuwerburgh, 2012. "International Capital Flows and House Prices: Theory and Evidence," NBER Chapters, in: Housing and the Financial Crisis, pages 235-299, National Bureau of Economic Research, Inc.
    25. Anil Kumar, 2018. "Do Restrictions on Home Equity Extraction Contribute to Lower Mortgage Defaults? Evidence from a Policy Discontinuity at the Texas Border," American Economic Journal: Economic Policy, American Economic Association, vol. 10(1), pages 268-297, February.
    26. Atif Mian & Amir Sufi, 2009. "The Consequences of Mortgage Credit Expansion: Evidence from the U.S. Mortgage Default Crisis," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 124(4), pages 1449-1496.
    27. Stijn Van Nieuwerburgh & Pierre-Olivier Weill, 2010. "Why Has House Price Dispersion Gone Up?," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 77(4), pages 1567-1606.
    28. Patrick Bajari & Chenghuan Sean Chu & Minjung Park, 2008. "An Empirical Model of Subprime Mortgage Default From 2000 to 2007," NBER Working Papers 14625, National Bureau of Economic Research, Inc.
    29. Wenli Li & Haiyong Liu & Fang Yang & Rui Yao, 2016. "Housing Over Time And Over The Life Cycle: A Structural Estimation," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 57(4), pages 1237-1260, November.
    30. Andra C. Ghent & Marianna Kudlyak, 2011. "Recourse and Residential Mortgage Default: Evidence from US States 1," The Review of Financial Studies, Society for Financial Studies, vol. 24(9), pages 3139-3186.
    31. 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.
    32. Robert Shimer, 2012. "Reassessing the Ins and Outs of Unemployment," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 15(2), pages 127-148, April.
    33. Neil Bhutta & Benjamin J. Keys, 2016. "Interest Rates and Equity Extraction during the Housing Boom," American Economic Review, American Economic Association, vol. 106(7), pages 1742-1774, July.
    34. Arthur Korteweg & Morten Sorensen, 2012. "Estimating Loan-to-Value and Foreclosure Behavior," NBER Working Papers 17882, National Bureau of Economic Research, Inc.
    35. Kyle F. Herkenhoff & Lee E. Ohanian, 2012. "Foreclosure delay and U.S. unemployment," Working Papers 2012-017, Federal Reserve Bank of St. Louis.
    36. Rui Yao, 2005. "Optimal Consumption and Portfolio Choices with Risky Housing and Borrowing Constraints," The Review of Financial Studies, Society for Financial Studies, vol. 18(1), pages 197-239.
    37. 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.
    38. Wenli Li & Haiyong Liu & Rui Yao, 2009. "Housing over time and over the life cycle: a structural estimation," Working Papers 09-7, Federal Reserve Bank of Philadelphia.
    39. Chang-Jin Kim & Charles R. Nelson, 1999. "State-Space Models with Regime Switching: Classical and Gibbs-Sampling Approaches with Applications," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262112388, April.
    Full references (including those not matched with items on IDEAS)

    Citations

    Blog mentions

    As found by EconAcademics.org, the blog aggregator for Economics research:
    1. How many mortgage defaults resulted from lofty expectations?
      by Economic Logician in Economic Logic on 2013-07-29 20:02:00

    Citations

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


    Cited by:

    1. Koşar, Gizem & Ransom, Tyler & van der Klaauw, Wilbert, 2022. "Understanding migration aversion using elicited counterfactual choice probabilities," Journal of Econometrics, Elsevier, vol. 231(1), pages 123-147.
    2. Paolo Sodini & Stijn Van Nieuwerburgh & Roine Vestman & Ulf von Lilienfeld-Toal, 2023. "Identifying the Benefits from Homeownership: A Swedish Experiment," American Economic Review, American Economic Association, vol. 113(12), pages 3173-3212, December.
    3. Charles Ka Yui Leung & Joe Cho Yiu Ng, 2018. "Macro Aspects of Housing," GRU Working Paper Series GRU_2018_016, City University of Hong Kong, Department of Economics and Finance, Global Research Unit.
    4. Terry O'Malley, 2021. "The Impact of Repossession Risk on Mortgage Default," Journal of Finance, American Finance Association, vol. 76(2), pages 623-650, April.
    5. Anil Kumar, 2018. "Do Restrictions on Home Equity Extraction Contribute to Lower Mortgage Defaults? Evidence from a Policy Discontinuity at the Texas Border," American Economic Journal: Economic Policy, American Economic Association, vol. 10(1), pages 268-297, February.
    6. Ono, Arito & Uchida, Hirofumi & Udell, Gregory F. & Uesugi, Iichiro, 2021. "Lending pro-cyclicality and macroprudential policy: Evidence from Japanese LTV ratios," Journal of Financial Stability, Elsevier, vol. 53(C).
    7. Jack Favilukis & David Kohn & Sydney C. Ludvigson & Stijn Van Nieuwerburgh, 2012. "International Capital Flows and House Prices: Theory and Evidence," NBER Chapters, in: Housing and the Financial Crisis, pages 235-299, National Bureau of Economic Research, Inc.
    8. 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.
    9. M. Dietsch & C. Welter-Nicol, 2014. "Do LTV and DSTI caps make banks more resilient?," Débats économiques et financiers 13, Banque de France.
    10. Christopher L. Foote & Lara Loewenstein & Paul S. Willen, 2018. "Technological Innovation in Mortgage Underwriting and the Growth in Credit: 1985-2015," Working Papers (Old Series) 1816, Federal Reserve Bank of Cleveland.
    11. Darren K. Hayunga & R. Kelley Pace & Shuang Zhu, 2019. "Borrower Risk and Housing Price Appreciation," The Journal of Real Estate Finance and Economics, Springer, vol. 58(4), pages 544-566, May.
    12. Arthur Korteweg & Morten Sorensen, 2012. "Estimating Loan-to-Value and Foreclosure Behavior," NBER Working Papers 17882, National Bureau of Economic Research, Inc.
    13. Christopher L. Foote & Paul S. Willen, 2018. "Mortgage-Default Research and the Recent Foreclosure Crisis," Annual Review of Financial Economics, Annual Reviews, vol. 10(1), pages 59-100, November.
    14. 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," The Review of Financial Studies, Society for Financial Studies, vol. 31(3), pages 1098-1131.
    15. Yifei Wu & Jeffrey H Dorfman, 2018. "Reducing residential mortgage default: Should policy act before or after home purchases?," PLOS ONE, Public Library of Science, vol. 13(7), pages 1-23, July.
    16. Dietsch, Michel & Petey, Joël, 2015. "The credit-risk implications of home ownership promotion: The effects of public subsidies and adjustable-rate loans," Journal of Housing Economics, Elsevier, vol. 28(C), pages 103-120.
    17. Neil Bhutta & Benjamin J. Keys, 2016. "Interest Rates and Equity Extraction during the Housing Boom," American Economic Review, American Economic Association, vol. 106(7), pages 1742-1774, July.
    18. Wadud, Mokhtarul & Ali Ahmed, Huson Joher & Tang, Xueli, 2020. "Factors affecting delinquency of household credit in the U.S.: Does consumer sentiment play a role?," The North American Journal of Economics and Finance, Elsevier, vol. 52(C).
    19. Davis, Morris A. & Van Nieuwerburgh, Stijn, 2015. "Housing, Finance, and the Macroeconomy," Handbook of Regional and Urban Economics, in: Gilles Duranton & J. V. Henderson & William C. Strange (ed.), Handbook of Regional and Urban Economics, edition 1, volume 5, chapter 0, pages 753-811, Elsevier.
    20. Gene Amromin & Caitlin Kearns, 2014. "Access to Refinancing and Mortgage Interest Rates: HARPing on the Importance of Competition," Working Paper Series WP-2014-25, Federal Reserve Bank of Chicago.

    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. Carlos Hatchondo, Juan & Martinez, Leonardo & Sánchez, Juan M., 2015. "Mortgage defaults," Journal of Monetary Economics, Elsevier, vol. 76(C), pages 173-190.
      • Juan Carlos Hatchondo & Leonardo Martinez & Juan M. Sanchez, 2011. "Mortgage defaults," Working Paper 11-05, Federal Reserve Bank of Richmond.
      • Mr. Leonardo Martinez & Juan Carlos Hatchondo & Mr. Juan M. Sanchez, 2012. "Mortgage Defaults," IMF Working Papers 2012/026, International Monetary Fund.
      • Juan Carlos Hatchondo & Leonardo Martinez & Juan M. Sanchez, 2011. "Mortgage defaults," Working Papers 2011-019, Federal Reserve Bank of St. Louis.
      • Juan Carlos Hatchondo & Leonardo Martinez & Juan M. Sanchez, 2015. "Mortgage Defaults," CAEPR Working Papers 2015-011, Center for Applied Economics and Policy Research, Department of Economics, Indiana University Bloomington.
    2. 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.
    3. Davis, Morris A. & Van Nieuwerburgh, Stijn, 2015. "Housing, Finance, and the Macroeconomy," Handbook of Regional and Urban Economics, in: Gilles Duranton & J. V. Henderson & William C. Strange (ed.), Handbook of Regional and Urban Economics, edition 1, volume 5, chapter 0, pages 753-811, Elsevier.
    4. John Y. Campbell, 2013. "Mortgage Market Design," Review of Finance, European Finance Association, vol. 17(1), pages 1-33.
    5. Piazzesi, M. & Schneider, M., 2016. "Housing and Macroeconomics," Handbook of Macroeconomics, in: J. B. Taylor & Harald Uhlig (ed.), Handbook of Macroeconomics, edition 1, volume 2, chapter 0, pages 1547-1640, Elsevier.
    6. 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," The Review of Financial Studies, Society for Financial Studies, vol. 31(3), pages 1098-1131.
    7. John Y. Campbell & João F. Cocco, 2015. "A Model of Mortgage Default," Journal of Finance, American Finance Association, vol. 70(4), pages 1495-1554, August.
    8. Jack Favilukis & Stijn Van Nieuwerburgh, 2021. "Out‐of‐Town Home Buyers and City Welfare," Journal of Finance, American Finance Association, vol. 76(5), pages 2577-2638, October.
    9. 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.
    10. Dietsch, Michel & Petey, Joël, 2015. "The credit-risk implications of home ownership promotion: The effects of public subsidies and adjustable-rate loans," Journal of Housing Economics, Elsevier, vol. 28(C), pages 103-120.
    11. Anil Kumar, 2018. "Do Restrictions on Home Equity Extraction Contribute to Lower Mortgage Defaults? Evidence from a Policy Discontinuity at the Texas Border," American Economic Journal: Economic Policy, American Economic Association, vol. 10(1), pages 268-297, February.
    12. Gene Amromin & Jennifer Huang & Clemens Sialm & Edward Zhong, 2018. "Complex Mortgages [Why don’t lenders renegotiate more home mortgages? Redefaults, self-cures, and securitization]," Review of Finance, European Finance Association, vol. 22(6), pages 1975-2007.
    13. 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.
    14. Yusuf VARLI & Gökhan ÖVENÇ, 2019. "Dynamic Analysis of Defaults and Prepayments in the Turkish Mortgage Market," Sosyoekonomi Journal, Sosyoekonomi Society, issue 27(39).
    15. Hui Chen & Michael Michaux & Nikolai Roussanov, 2020. "Houses as ATMs: Mortgage Refinancing and Macroeconomic Uncertainty," Journal of Finance, American Finance Association, vol. 75(1), pages 323-375, February.
    16. Alin Marius Andries & Anca Copaciu & Radu Popa & Razvan Vlahu, 2021. "Recourse and (strategic) mortgage defaults: Evidence from changes in housing market laws," Working Papers 727, DNB.
    17. Nam, Tong-yob & Oh, Seungjoon, 2021. "Non-recourse mortgage law and housing speculation," Journal of Banking & Finance, Elsevier, vol. 133(C).
    18. Albanesi, Stefania & DeGiorgi, Giacomo & Nosal, Jaromir, 2022. "Credit growth and the financial crisis: A new narrative," Journal of Monetary Economics, Elsevier, vol. 132(C), pages 118-139.
    19. Pancrazi, Roberto & Pietrunti, Mario, 2019. "Natural expectations and home equity extraction," Journal of Housing Economics, Elsevier, vol. 46(C).
    20. Francisco Gomes & Michael Haliassos & Tarun Ramadorai, 2021. "Household Finance," Journal of Economic Literature, American Economic Association, vol. 59(3), pages 919-1000, September.

    More about this item

    JEL classification:

    • D14 - Microeconomics - - Household Behavior - - - Household Saving; Personal Finance
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation
    • E20 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - General (includes Measurement and Data)
    • R2 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Household Analysis

    NEP fields

    This paper has been announced in the following NEP Reports:

    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:fip:fedgfe:2013-30. See general information about how to correct material in RePEc.

    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: Ryan Wolfslayer ; Keisha Fournillier (email available below). General contact details of provider: https://edirc.repec.org/data/frbgvus.html .

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

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.