Decomposing the Foreclosure Crisis: House Price Depreciation versus Bad Underwriting

47 Pages Posted: 23 Mar 2015

See all articles by Kristopher Gerardi

Kristopher Gerardi

Federal Reserve Bank of Atlanta

Adam Hale Shapiro

Federal Reserve Bank of San Francisco

Paul Willen

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

Date Written: September 2009

Abstract

We estimate a model of foreclosure using a data set that includes every residential mortgage, purchase-and-sale, and foreclosure transaction in Massachusetts from 1989 to 2008. We address the identification issues related to the estimation of the effects of house prices on residential foreclosures. We then use the model to study the dramatic increase in foreclosures that occurred in Massachusetts between 2005 and 2008 and conclude that the foreclosure crisis was primarily driven by the severe decline in housing prices that began in the latter part of 2005, not by a relaxation of underwriting standards on which much of the prevailing literature has focused. We argue that relaxed underwriting standards did severely aggravate the crisis by creating a class of homeowners who were particularly vulnerable to the decline in prices. But, as we show in our counterfactual analysis, that emergence alone, in the absence of a price collapse, would not have resulted in the substantial foreclosure boom that was experienced.

Keywords: foreclosure, mortgage, house prices

JEL Classification: D11, D12, G21

Suggested Citation

Gerardi, Kristopher S. and Shapiro, Adam Hale and Willen, Paul S., Decomposing the Foreclosure Crisis: House Price Depreciation versus Bad Underwriting (September 2009). FRB Atlanta Working Paper No. 2009-25, Available at SSRN: https://ssrn.com/abstract=2481254 or http://dx.doi.org/10.2139/ssrn.2481254

Kristopher S. Gerardi (Contact Author)

Federal Reserve Bank of Atlanta ( email )

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404-498-8561 (Phone)

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

Adam Hale Shapiro

Federal Reserve Bank of San Francisco ( email )

101 Market Street
San Francisco, CA 94105
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

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