Individual and Local Effects of Unemployment on Mortgage Defaults

Abstract

Using survey data from the Panel Study of Income Dynamics, we document descriptively that unemployment has a relatively large effect on individual mortgage default rates: The average default rate for the employed is 2.4%; whereas for the unemployed, it is 8.5%. Once several other characteristics are controlled for, the unemployed have default rates that are 4 percentage points larger than those of the employed; and when endogeneity is additionally accounted for, the unemployment effect on default rates declines to 3 percentage points. Moreover, we find that more granular metrics for unemployment entail lower comparable effects of unemployment on default rates. That is, the comparable effect of individual unemployment on mortgage defaults is rather lower than the effect of state or county unemployment rates. This finding suggests that local metrics of unemployment, rather than attenuating possibly large individual unemployment effects on defaults, indeed contain more information than the aggregation of these individual effects.

Keywords: mortgage debt, mortgage defaults, unemployment, consumer credit

JEL Classification: G21, R31, J64