Can't Pay or Won't Pay? Unemployment, Negative Equity, and Strategic Default

74 Pages Posted: 12 Oct 2015 Last revised: 21 Oct 2015

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)

Multiple version iconThere are 2 versions of this paper

Date Written: October 2015

Abstract

This paper exploits matched data from the PSID on borrower mortgages with income and demographic data to quantify the relative importance of negative equity, versus lack of ability to pay, as affecting default between 2009 and 2013. These data allow us to construct household budgets sets that provide better measures of ability to pay. We use instrumental variables to quantify the impact of ability to pay, including job loss and disability, versus negative equity. Changes in ability to pay have the largest estimated effects. Job loss has an equivalent effect on default likelihood as a 35 percent decline in equity.

Suggested Citation

Gerardi, Kristopher S. and Herkenhoff, Kyle and Ohanian, Lee E. and Willen, Paul S., Can't Pay or Won't Pay? Unemployment, Negative Equity, and Strategic Default (October 2015). NBER Working Paper No. w21630, Available at SSRN: https://ssrn.com/abstract=2672744

Kristopher S. Gerardi (Contact Author)

Federal Reserve Bank of Atlanta ( email )

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Kyle Herkenhoff

University of Minnesota - Minneapolis ( email )

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Lee E. Ohanian

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

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National Bureau of Economic Research (NBER)

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Paul S. Willen

Federal Reserve Bank of Boston - Research Department ( email )

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National Bureau of Economic Research (NBER)

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Cambridge, MA 02138
United States

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