Default Option Exercise Over the Financial Crisis and Beyond
59 Pages Posted: 15 Apr 2016
Date Written: April 6, 2016
We document increased ruthlessness of mortgage default option exercise over the financial crisis and beyond. For a given level of negative equity, borrower propensity to default rose markedly over the 2007-2012 period and among hard-hit metropolitan areas. We show that elevated default option exercise was more salient to crisis-period defaults than were adverse shocks to home equity. Analysis of time-series and panel data indicates that proxies for the local business cycle, consumer sentiment, and federal foreclosure mitigation programs explain much of the rise in the negative equity beta. Difference-in-difference tests further corroborate unintended consequences of the Home Affordable Modification Program (HAMP) on borrower default option exercise.
Keywords: Mortgage default; option exercise; negative equity beta; HAMP
JEL Classification: G21; G12; C13; G18
Suggested Citation: Suggested Citation