Negative Equity and Foreclosure: Theory and Evidence

36 Pages Posted: 30 Jun 2008

See all articles by Christopher L. Foote

Christopher L. Foote

Federal Reserve Bank of Boston

Kristopher Gerardi

Federal Reserve Bank of Atlanta

Paul Willen

Federal Reserve Bank of Boston - Research Department; National Bureau of Economic Research (NBER)

Date Written: June 5, 2008

Abstract

Millions of Americans have negative housing equity, meaning that the outstanding balance on their mortgage exceeds their home's current market value. Our data show that the overwhelming majority of these households will not lose their homes. Our finding is consistent with historical evidence: we examine more than 100,000 homeowners in Massachusetts who had negative equity during the early 1990s and find that fewer than 10 percent of these owners eventually lost their home to foreclosure. This result is also, contrary to popular belief, completely consistent with economic theory, which predicts that from the borrower's perspective, negative equity is a necessary but not a sufficient condition for foreclosure. Our findings imply that lenders and policymakers face a serious information problem in trying to help borrowers with negative equity, because it is difficult to determine which borrowers actually require help in order to prevent the loss of their homes to foreclosure.

JEL Classification: D11, D12, G21, R20

Suggested Citation

Foote, Christopher L. and Gerardi, Kristopher S. and Willen, Paul S., Negative Equity and Foreclosure: Theory and Evidence (June 5, 2008). FRB of Boston Public Policy Discussion Paper No. 08-3. Available at SSRN: https://ssrn.com/abstract=1153413 or http://dx.doi.org/10.2139/ssrn.1153413

Christopher L. Foote (Contact Author)

Federal Reserve Bank of Boston ( email )

600 Atlantic Avenue
Boston, MA 02210
United States
617-973-3077 (Phone)
617-973-3957 (Fax)

Kristopher S. Gerardi

Federal Reserve Bank of Atlanta ( email )

1000 Peachtree Street N.E.
Atlanta, GA 30309-4470
United States
404-498-8561 (Phone)

HOME PAGE: http://sites.google.com/site/kristophergerardishomepage/

Paul S. Willen

Federal Reserve Bank of Boston - Research Department ( email )

600 Atlantic Avenue
Boston, MA 02210
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Register to save articles to
your library

Register

Paper statistics

Downloads
234
Abstract Views
1,298
rank
130,564
PlumX Metrics