Rebuilding Household Credit Histories: Slow Jobless Recovery from Mortgage Crises
82 Pages Posted: 13 Jun 2014 Last revised: 13 Jan 2015
Date Written: January 2015
This paper demonstrates that credit reporting -- banks observing households' default histories -- can cause slow recoveries of housing prices and employment from mortgage crises. Comparing credit cycles with and without credit reporting and capturing the impact of mortgage default on employment by extending the Diamond-Mortensen-Pissarides search framework, I find that with credit reporting, banks offer higher loan-to-value ratios on mortgages but the default risks on them are higher. The recovery after a bank liquidity tightening is slower because: (i) excluding defaulting borrowers from obtaining mortgages decreases demand for housing; (ii) foreclosure tightens firms' available credit; and (iii) further default constrains banks' liquidity. These effects are absent without credit reporting.
Keywords: credit history, jobless recovery, mortgage default, business cycles
JEL Classification: E21, E24, E32, E44, G01, G11, G21, J23, J63
Suggested Citation: Suggested Citation