Unemployment, Negative Equity, and Strategic Default

50 Pages Posted: 13 Jul 2013

See all articles by Kristopher Gerardi

Kristopher Gerardi

Federal Reserve Bank of Atlanta

Kyle Herkenhoff

University of Minnesota - Minneapolis

Lee E. Ohanian

University of California, Los Angeles (UCLA) - Department of Economics; National Bureau of Economic Research (NBER)

Paul Willen

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

Date Written: July 12, 2013

Abstract

Using new household level data, we quantitatively assess the roles that (i) job loss, (ii) negative equity, and (iii) wealth (including unsecured debt, liquid, and illiquid assets) play in default decisions. In sharp contrast to prior studies that proxy for individual unemployment status using regional unemployment rates, we find that individual unemployment is the strongest predictor of default. We find that individual unemployment increases the probability of default by 5-13 percentage points, ceteris paribus, compared to the sample average default rate of 3.9%. We also find that only 13.9% of defaulters have both negative equity and enough liquid or illiquid assets to make 1 month’s mortgage payment. This suggests that "ruthless," or "strategic" default during the 2007-2009 recession is relatively rare, and suggests that policies designed to promote employment, such as payroll tax cuts, are most likely to stem defaults in the long run rather than policies that temporarily modify mortgages.

Keywords: unemployment, employment, job loss, assets, mortgage, modifications, default, strategic, strategic default, negative equity, trigger, single trigger, double trigger, liquidity constraint, mortgage default, delinquency, PSID, mortgage distress, financial liquidity, negative equity and unemployment

JEL Classification: E24, E30, G21, E60, D12, D14, E51, G33, L85, R31

Suggested Citation

Gerardi, Kristopher S. and Herkenhoff, Kyle and Ohanian, Lee E. and Willen, Paul S., Unemployment, Negative Equity, and Strategic Default (July 12, 2013). Available at SSRN: https://ssrn.com/abstract=2293152 or http://dx.doi.org/10.2139/ssrn.2293152

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/

Kyle Herkenhoff (Contact Author)

University of Minnesota - Minneapolis ( email )

110 Wulling Hall, 86 Pleasant St, S.E.
308 Harvard Street SE
Minneapolis, MN 55455
United States

Lee E. Ohanian

University of California, Los Angeles (UCLA) - Department of Economics ( email )

Box 951477
8283 Bunch Hall
Los Angeles, CA 90095-1477
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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
295
Abstract Views
1,787
rank
105,051
PlumX Metrics