Regulating Mortgage Leverage: Fire Sales, Foreclosure Spirals and Pecuniary Externalities

79 Pages Posted: 16 Nov 2014 Last revised: 25 Mar 2017

See all articles by Albert A. Zevelev

Albert A. Zevelev

City University of New York - Department of Real Estate; University of Pennsylvania - The Wharton School

Date Written: March 24, 2017

Abstract

This paper introduces a dynamic general equilibrium model to study how the distribution of leverage and foreclosure affect house prices.

The model shows how foreclosure sales, through their effect on housing supply, amplify and propagate house price drops. A calibration shows consumption and housing need to be sufficiently complementary to fit the data. Since leverage plays a key role in foreclosure, a regulator can reduce systemic risk by placing a cap on leverage. Counterfactual experiments show that in a world with less leverage, the same economic shock leads to less foreclosure and less severe, shorter busts in house prices.

Keywords: Leverage, Fire Sales, Foreclosure, Pecuniary Externalities, Macroprudential, Regulation

JEL Classification: E, E2, E5, E6, G, G1, R

Suggested Citation

Zevelev, Albert A., Regulating Mortgage Leverage: Fire Sales, Foreclosure Spirals and Pecuniary Externalities (March 24, 2017). Available at SSRN: https://ssrn.com/abstract=2524764 or http://dx.doi.org/10.2139/ssrn.2524764

Albert A. Zevelev (Contact Author)

City University of New York - Department of Real Estate ( email )

United States

University of Pennsylvania - The Wharton School ( email )

3641 Locust Walk
Philadelphia, PA 19104-6365
United States

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