Mortgage-Default Research and the Recent Foreclosure Crisis
Posted: 8 Nov 2018
Date Written: November 2018
This article reviews the surge in research on mortgage default inspired by the recent foreclosure crisis. Economists already understood a great deal about default, both theoretically and empirically, when the crisis began, but new research has moved the frontier further by improving data sources, building dynamic optimizing models of default, and explicitly addressing reverse causality between rising foreclosures and falling house prices. Mortgage defaults also featured prominently in early papers that pointed to subprime and other privately securitized mortgages as fundamental drivers of the housing boom, although this research has been criticized recently. Going forward, improvements to data and models will allow researchers to make progress on the two central questions in this literature. First, what are the relative contributions of adverse life events and negative equity to mortgage default? Second, why is default so rare, even among people with deep negative equity or acute financial distress?
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