17
Dec
10

Paper: Hipotecas (x3)

Strategic Default on First and Second Lien Mortgages  During the Financial Crisis

Abstract

Strategic default behavior suggests that the default process is not only a matter of inability to pay.   Economic costs and benefits affect the incidence and timing of defaults.  As with prior research, we find that people default strategically as their home value falls below the mortgage value (exercise the put option to default on their first mortgage).   While some of these homeowners default on both first mortgages and second lien home equity lines, a large portion of the delinquent borrowers have kept their second lien current during the recent financial crisis.  These second liens, which are current but stand behind a seriously delinquent first mortgage, are subject to a high risk of default.   On the other hand, relatively few borrowers default on their second liens while remaining current on their first.  This paper explores the strategic factors that may affect borrower decisions to default on first vs. second lien mortgages.  We find that borrowers are more likely to remain current on their second lien if it is a home equity line of credit (HELOC) as compared to a closed-end home equity loan.  Moreover, the size of the unused line of credit is an important factor.  Interestingly, we find evidence that the various mortgage loss mitigation programs also play a role in providing incentives for homeowners to default on their first mortgages.

Link al Paper

 

Location Efficiency and Mortgage Default

Abstract

Using a sample of over 40,000 mortgages in Chicago, Jacksonville, andSan Francisco, we model the probability of mortgage default based on differences in location efficiency. We used two proxy variables for location efficiency: 1) vehicles per household scaled by income and 2)Walk Score. We find that default probability increases with the number of vehicles owned after controlling for income. Further, we find that default probability decreases with higher Walk Scores in high income areas but increases with higher Walk Scores in low income areas. These results suggest that some degree of greater mortgage underwriting flexibility could be provided to assist households with the purchase of location efficient homes, without increasing mortgage default. They also support the notion that government policies around land use, zoning,infrastructure, and transportation could have significant impacts on mortgage default rates.

Link al Paper

 

Mortgage Choices and Housing Speculation

Abstract

We describe a rational expectations model in which speculative bubbles in house prices can emerge. Within this model both speculators and their lenders use interest-only mortgages (IOs) rather than traditional mortgages when there is a bubble. Absent a bubble, there is no tendency for IOs to be used. These insights are used to assess the extent to which house prices in US cities were driven by speculative bubbles over the period 2000-2008. We find that IOs were used sparingly in cities where elastic housing supply precludes speculation from arising. In cities with inelastic supply, where speculation is possible, there was heavy use of IOs, but only in cities that had boom-bust cycles. Peak IO usage predicts rapid appreciations that cannot be explained by standard correlates and this variable is more robustly correlated with rapid appreciations than other mortgage characteristics, including sub-prime, securitization and leverage.Where IOs were popular, their use does not appear to have been a response to houses becoming more expensive. Indeed, their use anticipated future appreciation. Finally,consistent with the reason why lenders prefer IOs, these mortgages are more likely to berepaid earlier or foreclose. Combined with our model, this evidence suggests that speculative bubbles were an important factor driving prices in cities with boom-bust cycles.

Link al Paper

 

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