A Dynamic Model of Subprime Mortgage Default: Estimation and Policy Implications

65 Pages Posted: 1 Mar 2013

See all articles by Patrick Bajari

Patrick Bajari

University of Michigan at Ann Arbor - Department of Economics; National Bureau of Economic Research (NBER)

Chenghuan Sean Chu

Federal Reserve Board of Governors

Denis Nekipelov

University of Virginia

Denis Nekipelov

University of California, Berkeley

Minjung Park

Ewha Womans University

Date Written: February 2013

Abstract

The increase in defaults in the subprime mortgage market is widely held to be one of the causes behind the recent financial turmoil. Key issues of policy concern include quantifying the role of various factors, such as home price declines and loosened underwriting standards, in the recent increase in subprime defaults and predicting the effects of various policy instruments designed to mitigate default. To address these questions, we estimate a dynamic structural model of subprime borrowers' default behavior. We prove that borrowers' time preference is identified in our model and propose an easily implementable semiparametric plug-in estimator. Our results show that principal writedowns have a significant effect on borrowers' default behavior and welfare: a uniform 10% reduction in outstanding mortgage balance for the pool of borrowers in our sample would reduce the overall default probability by 22%, and borrowers' average willingness to pay for the principal writedown would be $16,643

Suggested Citation

Bajari, Patrick and Chu, Chenghuan Sean and Nekipelov, Denis and Nekipelov, Denis and Park, Minjung, A Dynamic Model of Subprime Mortgage Default: Estimation and Policy Implications (February 2013). NBER Working Paper No. w18850, Available at SSRN: https://ssrn.com/abstract=2226819

Patrick Bajari (Contact Author)

University of Michigan at Ann Arbor - Department of Economics ( email )

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Ann Arbor, MI 48109-1220
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HOME PAGE: http://www-personal.umich.edu/~bajari/

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
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Chenghuan Sean Chu

Federal Reserve Board of Governors ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

Denis Nekipelov

University of Virginia ( email )

1400 University Ave
Charlottesville, VA 22903
United States

Denis Nekipelov

University of California, Berkeley ( email )

310 Barrows Hall
Berkeley, CA 94720
United States

Minjung Park

Ewha Womans University ( email )

11-1 Daehyun-dong
Seodaemun-gu
Seoul 120-750, Seoul Seoul 120
Korea, Republic of (South Korea)

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