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Journal Article
Europe may provide lessons on preventing mortgage defaults
Sanchez, Juan M.; Martinez, Leonardo; Hatchondo, Juan Carlos (2013-07)
During the last global recession, house prices fell in some European countries almost as much as in some U.S. states. However, mortgage defaults occurred at a much lower rate in Europe. The authors say the difference might be explained by two regulations that apply in Europe but are used on a limited or much less restrictive basis in the U.S.
The Regional Economist , Issue July

Working Paper
A quantitative theory of unsecured consumer credit with risk of default
Nakajima, Makoto; Corbae, Dean; Rios-Rull, Jose-Victor; Chatterjee, Satyajit (2007)
The authors study, theoretically and quantitatively, the general equilibrium of an economy in which households smooth consumption by means of both a riskless asset and unsecured loans with the option to default. The default option resembles a bankruptcy filing under Chapter 7 of the U.S. Bankruptcy Code. Competitive financial intermediaries offer a menu of loan sizes and interest rates wherein each loan makes zero profits. They prove the existence of a steady-state equilibrium and characterize the circumstances under which a household defaults on its loans. They show that their model accounts ...
Working Papers , Paper 07-16

Report
On bounding credit event risk premia
Bai, Jennie; Goldstein, Robert S.; Helwege, Jean; Collin-Dufresne, Pierre (2012)
Reduced-form models of default that attribute a large fraction of credit spreads to compensation for credit event risk typically preclude the most plausible economic justification for such risk to be priced--namely, a ?contagious? response of the market portfolio during the credit event. When this channel is introduced within a general equilibrium framework for an economy comprised of a large number of firms, credit event risk premia have an upper bound of just a few basis points and are dwarfed by the contagion premium. We provide empirical evidence supporting the view that credit event risk ...
Staff Reports , Paper 577

Report
Juvenile delinquent mortgages: bad credit or bad economy?
Peach, Richard; Tracy, Joseph; Haughwout, Andrew F. (2008)
We study early default, defined as serious delinquency or foreclosure in the first year, among nonprime mortgages from the 2001 to 2007 vintages. After documenting a dramatic rise in such defaults and discussing their correlates, we examine two primary explanations: changes in underwriting standards that took place over this period and changes in the economic environment. We find that while credit standards were important in determining the probability of an early default, changes in the economy after 2004 - especially a sharp reversal in house price appreciation - were the more critical ...
Staff Reports , Paper 341

Journal Article
Risky mortgages and mortgage default premiums
Krainer, John; LeRoy, Stephen F. (2010)
Mortgage lenders impose a default premium on the loans they originate to compensate for the possibility that borrowers won?t make payments. The housing boom of the 2000s was characterized by increasing riskiness of the borrowers approved for mortgages and the structures of the loans themselves. Despite these changes in risk, a pricing model can justify the spreads contained in mortgages made during this period based on what at the time seemed to be reasonable expectations for house price appreciation. Contrary to those expectations, prices fell dramatically.
FRBSF Economic Letter

Working Paper
Mortgage Default and Mortgage Valuation
Krainer, John; O, Munpyung; LeRoy, Stephen F. (2009-09-01)
We develop an equilibrium valuation model that incorporates optimal default to show how mortgage yields and lender recovery rates on defaulted mortgages depend on initial loan-to-value (LTV) ratios. The analysis treats both the frictionless case and the case in which borrowers and lenders incur deadweight costs upon default. The model is calibrated using data on California mortgages. Given reasonable parameter values, the model does a surprisingly good job fitting the risk premium in the data for high LTV mortgages. Thus, from an ex ante perspective, we do not find strong evidence of ...
Working Paper Series , Paper 2009-20

Journal Article
Solving the present crisis and managing the leverage cycle
Geanakoplos, John (2010-08)
Yale University professor John Geanakoplos discusses implications of ?the leverage cycle??a phenomenon in which leverage is excessive prior to a financial crisis and unacceptably low during the crisis?for regulatory policy and reform. Presented as the keynote address at "Central Bank Liquidity Tools and Perspectives on Regulatory Reform" a conference sponsored by the Federal Reserve Bank of New York, February 19-20, 2009.
Economic Policy Review , Volume 16 , Issue Aug , Pages 101-131

Journal Article
Quantitative models of sovereign default and the threat of financial exclusion
Sapriza, Horacio; Martinez, Leonardo; Hatchondo, Juan Carlos (2007-07)
Economic Quarterly , Volume 93 , Issue Sum , Pages 251-286

Journal Article
The economics of sovereign defaults
Sapriza, Horacio; Martinez, Leonardo; Hatchondo, Juan Carlos (2007-04)
Economic Quarterly , Volume 93 , Issue Spr , Pages 163-187

Working Paper
An empirical analysis of bond recovery rates: exploring a structural view of default
Han, Song; Covitz, Daniel M. (2004)
A frictionless, structural view of default has the unrealistic implication that recovery rates on bonds, measured at default, should be close to 100 percent. This suggests that standard "frictions" such as default delays, corporate-valuation jumps, and bankruptcy costs may be important drivers of recovery rates. A structural view also suggests the existence of nonlinearities in the empirical relationship between recovery rates and their determinants. We explore these implications empirically and find direct evidence of jumps, and also evidence of the predicted nonlinearities. In particular, ...
Finance and Economics Discussion Series , Paper 2005-10

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