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

Kristopher Gerardi; Kyle Herkenhoff; Lee E. Ohanian; Paul S. Willen

doi:10.1093/rfs/hhx115

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

Kristopher Gerardi¹; Kyle Herkenhoff²; Lee E. Ohanian³; Paul S. Willen⁴

¹ Federal Reserve Bank of Atlanta · ² University of Minnesota · ³ UCLA and ASU · ⁴ Federal Reserve Bank of Boston

Review of Financial Studies 2018 open access

This paper uses new data from the PSID to quantify the relative importance of negative equity versus ability to pay, in driving mortgage defaults between 2009 and 2013. These data allow us to construct household budgets sets that provide better measures of ability to pay. Changes in ability to pay have large estimated effects. Job loss has an equivalent effect on the propensity to default as a 35% decline in equity. Strategic motives are also found to be quantitatively important, as we estimate more than 38% of households in default could make their mortgage payments without reducing consumption.

DOI: 10.1093/rfs/hhx115
Volume: 31 (3)
Pages: 1098-1131
Language: en
Export: BibTeX
Sources: crossref openalex