Differential Impacts of Structural and Cyclical Unemployment on Mortgage Default and Prepayment

Abstract

The Great Recession (the fourth quarter of 2007 through the second quarter of 2009) has been characterized by high rates of foreclosures and unemployment. Using a sample of community reinvestment loans, we examine the impact of structural unemployment and cyclical unemployment on mortgage terminations (default and prepayment). We find that mortgage default and prepayment are more sensitive to changes in the structural components of the local unemployment rate than in the cyclical component. In addition, depending on whether structural unemployment rates are high or low, borrowers and lenders react differently to the incentives to terminate a loan.

Keywords: Structural and cyclical unemployment, Mortgage performance

JEL Classification: D12, G21, R22