Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/130700
Authors: 
Gerardi, Kristopher
Herkenhoff, Kyle F.
Ohanian, Lee E.
Willen, Paul S.
Year of Publication: 
2015
Series/Report no.: 
Working Papers, Federal Reserve Bank of Boston 15-13
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 payment 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.
JEL: 
D12
D14
D19
Document Type: 
Working Paper

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