Foreclosure Sales: The Effects of Price Expectations, Volatility and Equity Losses

34 Pages Posted: 14 Nov 2006

See all articles by Seow Eng Ong

Seow Eng Ong

National University of Singapore (NUS) - Department of Real Estate

Poh Har Neo

National University of Singapore (NUS)

Yong Tu

National University of Singapore (NUS)

Abstract

Where borrowers are personally liable for shortfalls when they default on their mortgages, lenders have to exercise a duty of good faith in securing a reasonable value for the foreclosed property. The lender is entitled to recover the outstanding loan as quickly as possible, and is not bound to sell the foreclosed property at the highest price. Such an institutional setting allows us to study lender and borrower behavior, specifically the influence of price expectations, volatility and equity losses on foreclosure transactions using non-foreclosure transactions as a comparison. Our results show the differences in seller response to market expectations and equity losses exist across foreclosure and non-foreclosure transactions. Seller behavior matters. While price expectations, volatility and equity losses are influential factors for individual households, past price movements is the most important. This study also further seeks to distinguish loss aversion from disposition effect. By controlling for properties that suffered losses in equity but did not sell, we are able to examine the disposition effect in house owners. The result shows that there is disposition effect for non-foreclosure properties, where individual homeowners are reluctant to sell if the properties suffer losses.

Keywords: Foreclosure, Recourse Mortgages, Equity Loss, Lender Behavior

JEL Classification: G20, G21, L85

Suggested Citation

Ong, Seow Eng and Neo, Poh Har and Tu, Yong, Foreclosure Sales: The Effects of Price Expectations, Volatility and Equity Losses. Journal of Real Estate Finance and Economics, Vol. 36, No. 3, 2008, Available at SSRN: https://ssrn.com/abstract=944772

Seow Eng Ong (Contact Author)

National University of Singapore (NUS) - Department of Real Estate ( email )

4 Architecture Drive
Singapore 117566
Singapore
01-65-6516-3552 (Phone)
01-65-6774-8684 (Fax)

Poh Har Neo

National University of Singapore (NUS) ( email )

1E Kent Ridge Road
NUHS Tower Block Level 7
Singapore, 119228
Singapore

Yong Tu

National University of Singapore (NUS) ( email )

1E Kent Ridge Road
NUHS Tower Block Level 7
Singapore, 119228
Singapore

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