Working Paper

Can't Pay or Won't Pay? Unemployment, Negative Equity, and Strategic Default

Abstract: This paper exploits matched data from the PSID on borrower mortgages with income and demographic data to quantify the relative importance of negative equity, versus lack of ability to pay, as affecting default between 2009 and 2013. These data allow us to construct household budgets sets that provide better measures of ability to pay. We use instrumental variables to quantify the impact of ability to pay, including job loss and disability, versus negative equity. Changes in ability to pay have the largest estimated effects. Job loss has an equivalent effect on default likelihood as a 35 percent decline in equity.

Keywords: unemployment; mortgage; default; strategic default; negative equity; liquidity constraint;

JEL Classification: D12; D14; E24; E30; E51; E60; G21; G33; L85; R31;

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Bibliographic Information

Provider: Federal Reserve Bank of Atlanta

Part of Series: FRB Atlanta Working Paper

Publication Date: 2017-06-01

Number: 2013-04

Pages: 47 pages