screening as a unied theory of delinquency renegotiation and bankruptcy we propose a parsimonious model with adverse selection where delinquency renegotiation and bankruptcy all occur in equilibrium as a result of a simple screening mechanism a borrower has private information about her cost of bankruptcy and a lender may use random contracts to screen dierent types of borrowers in equilibrium some borrowers choose not to repay and thus become delinquent the lender renegotiates with some delinquent borrowers in the absence of renegotiation delinquency leads to bankruptcy we apply the model to analyze eects of a government intervention in debt restructuring we show that a mortgage modication program aimed at limiting foreclosures that fails to take into account private debt restructuring may have the opposite eect from the one intended

recent developments in consumer credit and default literature this survey discusses recent contributions to the quantitative literature on unsecured consumer debt and default and some ongoing challenges for the literature key topics include the sources of the rise in personal bankruptcies the importance of asymmetric information and the effects of developments in information technologies on consumer credit markets delinquency and informal bankruptcy debt collection and restructuring of distressed debt the cyclical behavior of consumer debt and default and the insurance role of household debt implications for welfare analysis and policy design are discussed several theoretical contributions and approaches to modeling the consumer credit markets are also highlighted

consequences of debt forgiveness strategic default contagion and lender learning i use a unique data set of loans to small business owners to examine whether lenders face adverse consequences when they grant debt forgiveness to borrowers i provide evidence consistent with borrowers communicating their debt forgiveness to other borrowers who then more frequently strategically default on their own obligations this strategic default contagion is economically large when the lender doubles debt forgiveness the default rate increases by 10 9 on average using an exogenous shock to the lender s forgiveness policy my findings suggest that as the lender learns about the extent of borrower communication the lender tightens its debt forgiveness policy to mitigate default contagion

default and aggregate income abstract this paper studies how default varies with aggregate income we analyze a model in which optimal contracts enable risk sharing of privately observed idiosyncratic income by allowing for default default provisions allow agents with low idiosyncratic income realizations to repay less and thus provide insurance default penalties ensure that only these agents default we show that default can occur under the optimal contract and that default provisions vary with aggregate income we provide conditions such that both the amount of default and default penalties vary countercyclically with aggregate income and show that the default rate can be discontinuous

duration of sovereign debt renegotiation abstract in the period since 1990 sovereign debt renegotiations take an average of five years for bank loans but only one year for bonds we provide an explanation for this finding by highlighting one key difference between bank loans and bonds bank loans are rarely traded while bonds are heavily traded on the secondary market in our theory the secondary market plays a crucial information revelation role in shortening renegotiations consider a dynamic bargaining game with incomplete information between a government and creditors the creditors reservation value is private information and the government knows only its distribution delays in reaching agreements arise in equilibrium because the government uses costly delays to screen the creditors reservation value when the creditors trade on the secondary market the market price conveys information about their reservation value which lessens the information friction and reduces the renegotiation duration we find that the secondary market tends to increase the renegotiation payoff of the government but decrease that of the creditors while increasing the total payoff we then embed these renegotiation outcomes in a simple sovereign debt model to analyze the ex ante welfare implications the secondary market has the potential to increase the government ex ante welfare when the information friction is severe

consumer ruthlessness and mortgage default during the 2007 to 2009 housing bust from 2007 to 2009 u s house prices plunged and mortgage defaults surged while ostensibly consistent with widespread ruthless default analysis of detailed mortgage and house price data indicates that borrowers do not walk away until they are deeply underwater far deeper than traditional models predict the evidence suggests that lender recourse is not the major driver of this result we argue that emotional and behavioral factors play an important role in decisions to continue paying borrower reluctance to walk away implies that the moral hazard cost of default as a form of social insurance may be lower than suspected this article is protected by copyright all rights reserved

mortgage default during the u s mortgage crisis this paper asks which theories of mortgage default are quantitatively consistent with observations in the united states during 2002 2010 theoretical models are simulated for the observed time series of aggregate house prices their predictions are then compared to actual default rates on prime fixed rate mortgages an out of sample test discriminates between estimated reduced forms of the two most prominent theories the test reveals that the doubletrigger hypothesis attributing mortgage default to the joint occurrence of negative equity and a life event like unemployment outperforms a frictionless option theoretic default model based on this finding a structural partialequilibrium model with liquidity constraints and idiosyncratic unemployment shocks is presented to provide micro foundations for the double trigger hypothesis in this model borrowers with negative equity are more likely to default when they are unemployed and have low liquid wealth the model explains most of the observed strong rise in mortgage default rates a policy implication of the model is that subsidizing homeowners can mitigate a mortgage crisis at a lower cost than bailing out lenders

state foreclosure laws and the incidence of mortgage default abstractthis paper examines how differences in state foreclosure laws influence the incidence of default in the residential mortgage market in particular we examine how judicial review requirements lenders recourse rights deficiency judgments and state assistance programs for distressed borrowers affected the likelihood of default during the recent u s housing crisis we argue that state foreclosure laws should have little effect on the likelihood of liquidity events for example shocks to borrowers ability to make payments and thus provide a good instrument for identifying borrowers costs of default we find that borrowers with negative home equity are significantly more likely to default in states with borrower friendly foreclosure laws finally we examine how recent state and federal loan foreclosure prevention programs affected the likelihood of default overall we find a significant decline in the effect of judicial review requirements but not deficiency judgments on default after 2008

accuracy of mortgage portfolio risk forecasts during financial crises abstract this paper explores whether factor based credit portfolio risk models are able to predict losses in severe economic downturns such as the recent global financial crisis gfc within standard confidence levels the paper analyzes i the accuracy of default rate forecasts and ii whether forecast downturn percentiles value at risk var are sufficient to cover default rate outcomes over a quarterly and an annual forecast horizon uninformative maximum likelihood and informative bayesian techniques are compared as they imply different degrees of uncertainty we find that quarterly var estimates are generally sufficient but annual var estimates may be insufficient during economic downturns in addition the paper develops and analyzes models based on auto regressive adjustments of scores which provide a higher forecast accuracy the consideration of parameter uncertainty and auto regressive error terms mitigates the shortfall

securitization and distressed loan renegotiation evidence from the subprime mortgage crisis abstract we examine whether securitization impacts renegotiation decisions of loan servicers focusing on their decision to foreclose a delinquent loan conditional on a loan becoming seriously delinquent we find a significantly lower foreclosure rate associated with bank held loans when compared to similar securitized loans across various specifications and origination vintages the foreclosure rate of delinquent bank held loans is 3 to 7 lower in absolute terms 13 to 32 in relative terms there is a substantial heterogeneity in these effects with large effects among borrowers with better credit quality and small effects among lower quality borrowers a quasi experiment that exploits a plausibly exogenous variation in securitization status of a delinquent loan confirms these results

income distribution implications of rural household production economic well being is a difficult concept to measure it is defined theoretically by a household s or individual s total access to goods and services however economic well being is almost always measured empirically by money income moon and smolensky while money income provides a fairly accurate indicator of access to goods and services that can be purchased in the marketplace it fails to measure access to goods and services that are a result of household production such an omission means that empirical estimates of economic well being based solely on money income are biased if money income and household production are correlated concern about potential bias increases when attention is focused on comparing the economic well being of groups such as rural and urban households which may differ in their reliance on household production historically rural households have had less equal money income distributions than urban households foley however family members in rural households also spend more time in household production than do their urban counterparts goebel and hennon olson et al could it be that the relatively greater unevenness in the distribution of rural households money income is in part compensated for by differences in home productivity or would the addition of home production to measures of economic well being make the distribution of income across rural households even more unequal than their urban counterparts in this paper we explore how rural and urban income distributions change if the value of household production is added to money income

recourse and residential mortgage default evidence from us states we quantify the effect of recourse on default and find that recourse affects default by lowering the borrower s sensitivity to negative equity at the mean value of the default option for defaulted loans borrowers are 30 more likely to default in non recourse states furthermore for homes appraised at 500 000 to 750 000 borrowers are twice as likely to default in non recourse states we also find that defaults are more likely to occur through a lender friendly procedure such as a deed in lieu in states that allow deficiency judgments we find no evidence that mortgage interest rates are lower in recourse states the author 2011 published by oxford university press on behalf of the society for financial studies all rights reserved for permissions please e mail journals permissions oup com oxford university press

the value of a housewife s time by estimating the parameters of a production function whose inputs consist of family time and market goods the authors offer some new microeconomic estimates of the value of production that takes place in the home and also examine the concept of joint

recent developments in consumer credit and default literature consumer credit and default literature this survey discusses recent contributions to the quantitative literature on unsecured consumer debt and default and some ongoing challenges for the literature key topics include the sources of the rise in personal bankruptcies the importance of asymmetric information and the effects of developments in information technologies on consumer credit markets delinquency and informal bankruptcy debt collection and restructuring of distressed debt the cyclical behavior of consumer debt and default and the insurance role of household debt implications for welfare analysis and policy design are discussed several theoretical contributions and approaches to modeling the consumer credit markets are also highlighted

can t pay or won t pay unemployment negative equity and strategic default this paper uses new data from the psid to quantify the relative importance of negative equity versus ability to pay in driving mortgage defaults between 2009 and 2013 these data allow us to construct household budgets sets that provide better measures of ability to pay changes in ability to pay have large estimated effects job loss has an equivalent effect on the propensity to default as a 35 decline in equity strategic motives are also found to be quantitatively important as we estimate more than 38 of households in default could make their mortgage payments without reducing consumption received september 29 2015 editorial decision june 2 2017 by editor philip strahan authors have furnished an internet appendix which is available on the oxford university pressweb site next to the link to the final published paper online

when are modifications of securitized loans beneficial to investors loan modification is widely discussed as an alternative to foreclosure but little research has focused on quantifying its effect on loan performance i quantify this effect early in the housing crisis by exploiting exogenous variation in the incentives to modify securitized nonagency loans an additional modification reduces loan losses by 35 8 relative to the average loss this reduction suggests that the marginal benefit of modification likely exceeded the marginal cost consistent with the idea that high income borrowers may be better equipped to withstand bad economic times i find that modifications are especially beneficial when borrowers have larger loans received april 25 2016 editorial decision march 24 2017 by editor philip strahan

the effect of negative equity on mortgage default evidence from hamp s principal reduction alternative the home affordable modification program s hamp s principal reduction alternative pra is a government sponsored program to reduce the principal balances and monthly mortgage payments of troubled borrowers we examine the effect of principal forgiveness on borrowers subsequent mortgage default the program s rules imply a kink in the relationship between principal forgiveness and a borrower s initial equity level our identification strategy exploits the quasi experimental variation in principal forgiveness generated by this kink using a regression kink design rkd which compares the relationship between initial equity and default on either side of the kink we estimate that hamp pra reduced the quarterly default hazard from 3 8 to 3 1 received february 4 2015 accepted august 2 2015 by editor philip strahan

city equilibrium with borrowing constraints structural estimation and general equilibrium effects this article develops a general equilibrium model of location choice where mortgage approval rates determine household specific choice sets estimation of the model using san francisco bay area data reveals that the price sensitivity of borrowing constraints explains about two thirds of the price elasticity of neighborhood demand general equilibrium analysis of the 2000 2006 relaxation of lending standards predicts the following impacts on prices and neighborhood demographics i an increase in house prices accompanied by a compression of the price distribution and ii a reduction in the isolation of whites reflecting gentrification both predictions are supported by empirical observation

second chances subprime mortgage modification and redefault we examine how the structure of mortgage modification affects the likelihood that the mortgage redefaults over the next year we focus on pre hamp home affordable modification program subprime modifications where the borrower was seriously delinquent and the monthly payment was reduced the average redefault rate over the year following the modification is 56 redefault rates decline with the magnitude of reduction in monthly payments and redefault rates decline more when the payment reduction is achieved through principal forgiveness as compared to lower interest rates

optimal debt structure and the number of creditors within an optimal contracting framework we analyze the optimal number of creditors a company borrows from we also analyze the optimal allocation of security interests among creditors and intercreditor voting rules that govern renegotiation of debt contracts the key to our analysis is the idea that these aspects of the debt structure affect the outcome of debt renegotiation following a default debt structures that lead to inefficient renegotiation are beneficial in that they deter default but they are also costly if default is beyond a manager s control the optimal debt structure balances these effects we characterize how the optimal debt structure depends on firm characteristics such as its technology its credit rating and the market for its assets

no job no money no refi frictions to refinancing in a recession we study how employment documentation requirements and out of pocket closing costs constrain mortgage refinancing these frictions which bind most severely during recessions may significantly inhibit monetary policy pass through to study their effects on refinancing we exploit a federal housing administration policy change that excluded unemployed borrowers from refinancing and increased others out of pocket costs substantially these changes dramatically reduced refinancing rates particularly among the likely unemployed and those facing new out of pocket costs our results imply that unemployed and liquidity constrained borrowers have a high latent demand for refinancing cyclical variation in these factors may therefore affect both the aggregate and distributional consequences of monetary policy

why don t lenders renegotiate more home mortgages redefaults self cures and securitization we document the fact that servicers have been reluctant to renegotiate mortgages since the foreclosure crisis started in 2007 having performed payment reducing modifications on only about 3 percent of seriously delinquent loans we show that this reluctance does not result from securitization servicers renegotiate similarly small fractions of loans that they hold in their portfolios our results are robust to different definitions of renegotiation including the one most likely to be affected by securitization and to different definitions of delinquency our results are strongest in subsamples in which unobserved heterogeneity between portfolio and securitized loans is likely to be small and for subprime loans we use a theoretical model to show that redefault risk the possibility that a borrower will still default despite costly renegotiation and self cure risk the possibility that a seriously delinquent borrower will become current without renegotiation make renegotiation unattractive to investors

pricing mortgage default and foreclosure delay this paper extends current mortgage pricing models to recognize the impact that delays between default and foreclosure have on the value of default to the borrower and the resulting value of the mortgage to investors the model explicitly captures potential costs through postforeclosure deficiency judgments and benefits in the elimination of negative equity and free rent that must be weighed at the time of default in determining whether the ultimate put option via allowing foreclosure is in the money the results provide policy implications concerning the operation of the fha insurance program copyright 1997 by ohio state university press

an international perspective for mortgage market reform the united states and certain european countries e g ireland and spain have recently experienced serious distress in their residential mortgage markets public policy has responded with interventions to limit the deadweight costs of mortgage foreclosures but with limited success there are also open questions with respect to long term reforms in mortgage market structures in this paper i make use of the important differences that exist between u s and european mortgage markets to help identify those aspects of residential mortgage markets that are most in need of reform

natural disasters and labor markets abstract while it is clear that natural disasters have serious welfare consequences for affected populations less is known about how local labor markets in low income countries adjust to such large shocks combining data from the indonesia family life survey the desinventar database the u s geological survey and district level employment indicators this paper explores how a large earthquake in indonesia affected labor market outcomes in particular the evolution of wages across sectors i find that the earthquake had a positive effect on wage growth for workers who were employed in the agricultural sector at baseline i propose two mechanisms for this result a higher growth rate of the price of rice and a downward shift in the supply of workers in the agricultural sector i show that evidence mainly supports the latter labor shifted out of the agricultural sector into the construction sector raising the marginal product of labor in agriculture

negative equity and foreclosure theory and evidence abstract recent declines in housing prices have focused attention on the relationship between negative housing equity and mortgage default theory implies that negative equity is a necessary condition for default but not a sufficient one this often misunderstood result is clearly illustrated in a dataset of massachusetts homeowners during the early 1990s fewer than 10 percent of borrowers likely to have had negative equity at the end of 1991 experienced a foreclosure during the following three years an econometric model of default estimated on two decades of massachusetts housing data also predicts low default rates for current negative equity borrowers we develop a simple theoretical model to interpret these empirical findings and to assess potential foreclosure reduction policies our results imply that lenders and policymakers face an information problem in trying to help borrowers with negative equity because it is hard to determine which owners really need help in order to stay in their homes

securitization and mortgage renegotiation evidence from the great depression we use loan level data from the nyc metropolitan area to examine the extent to which lenders attempted to prevent foreclosures with concessionary modi cations during the great depression we nd no principal forgiveness in the sample and only a handful of concessionary mortgage modi cations of other types far more mortgages terminated through foreclosure than received any sort of concessionary modi cation the results indicate that there are signi cant impediments to renegotiation of residential mortgages beyond securitization as such less renegotiation seems unlikely to be a major cost of securitization of residential mortgages

forced asset sales and the concentration of outstanding debt evidence from the mortgage market we provide evidence that lenders differ in their ex post incentives to internalize price default externalities associated with the liquidation of collateralized debt using the mortgage market as a laboratory we conjecture that lenders with a large share of outstanding mortgages on their balance sheets internalize the negative spillovers associated with the liquidation of defaulting mortgages and thus are less inclined to foreclose we provide evidence consistent with our conjecture arguably as a consequence zip codes with a higher concentration of outstanding mortgages experience smaller house prices declines these results are not driven by unobservable zip code or lender characteristics

debt relief and slow recovery a decade after lehman abstract we follow a representative panel of millions of consumers in the united states from 2007 to 2017 and document new facts on the long term effects of the great recession there were about six million foreclosures over this period only a quarter of foreclosed households regained homeownership taking an average four years to do so this persistent loss of homeownership accounts for most of the decline in the u s homeownership rate despite massive stimulus and debt relief policies house prices consumption and unemployment remained below precrisis levels in about half of the zip codes in the united states regions that recovered to precrisis levels took on average four to five years regional variation in the extent and speed of recovery is strongly and persistently associated with frictions affecting the pass through of lower interest rates and debt relief to households

nondiscriminating foreclosure and voluntary liquidating costs since liquidation and bankruptcy are costly researchers have tried to find out why the claimants of a troubled firm do not work out a deal to avoid these costs in this article we show that if a creditor has to deal with multiple borrowers who might default it may be optimal for the creditor to randomly reject requests for a loan workout we further demonstrate that the optimal acceptance rate used by a creditor is positively related to the liquidating cost and negatively related to the default benefit our model is particularly relevant when analyzing the default decisions of mortgage borrowers and small business owners copyright 2002 oxford university press