EconStor >
University of Oslo >
Department of Economics, University of Oslo >
Memorandum, Department of Economics, University of Oslo >

Please use this identifier to cite or link to this item:

http://hdl.handle.net/10419/47301
  
Title:Contagious mortgage default PDF Logo
Authors:Børsum, Øystein
Issue Date:2010
Series/Report no.:Memorandum // Department of Economics, University of Oslo 2010,10
Abstract:This paper analyses the default option typical to American mortgages. Households borrow to buy durable housing, but future house prices are uncertain, and households find it dvantageous to default on their debt if house prices fall sufficiently. A key assumption of the model is that households are relegated to the rental market upon default, and that there is a small pecuniary inefficiency ('iceberg cost') in renting. This leads defaulters to substitute consumption of other goods for housing; that is, the demand for housing falls upon default. Consequently, when some households default, aggregate demand for housing is reduced, hence house prices fall more, possibly inciting other households to default. This complementarity is a source of multiple equilibria, and a price externality. Using a specific case for which an analytical solution can be derived, I show that contagion is possible: it may be that the default of a minority (interpretable as sub-prime borrowers) spreads to a majority (interpretable as prime borrowers).
Subjects:Housing demand
mortgage market
default risk
multiple equilibria
contagion
JEL:E21
G11
R21
Document Type:Working Paper
Appears in Collections:Memorandum, Department of Economics, University of Oslo

Files in This Item:
File Description SizeFormat
63237280X.pdf444.93 kBAdobe PDF
No. of Downloads: Counter Stats
Download bibliographical data as: BibTeX
Share on:http://hdl.handle.net/10419/47301

Items in EconStor are protected by copyright, with all rights reserved, unless otherwise indicated.