payment changes and default risk the impact of refinancing on expected credit losses abstract this paper analyzes how access to credit and the path of mortgage rates can affect borrower credit risk this is a crucial issue for evaluating refinance programs as a form of loss mitigation and it became prominent in the debates around the treasury department s home affordable refinance program harp these debates exposed gaps in the literature on the relationship between credit performance and changes in borrowers monthly mortgage payments since then several new studies have attempted to fill these holes each pursing a different methodology in this paper we review the relevant debates and look at what downward adjustments in prime adjustable rate mortgages can tell us about modifications of prime fixed rate mortgages we argue that this method better addresses the various sampling biases that plague all attempts to predict harp s impact our analysis indicates that typical monthly payment reductions under harp would reduce credit losses by 56 basis points

collateral damage refinancing constraints and regional recessions in the current structure of the u s residential mortgage market a decrease in property values may make it very difficult for homeowners to refinance their mortgages to take advantage of declining interest rates in this papr we show that this form of collateral constraint has greatly reduced refinancing in statds with depressed property markets we outline the interaction between regional recessions and refinancing constraints when adverse economic shocks cause property values in a region to decrease the damage to the collateral makes it difficult or impossible for some homeowners to obtain new mortgages in the recent period this has meant that homeowners in economically depressed regions have been unable to refinance their mortgages to take advantage of declining interest rates this inability to refinance has further economic impacts on the region through lowering the wealth and the discretionary income of local homeowners thereby deepening the regional recession while the possible link between regional declines in property values and refinancing activity has been understood for some time for example monsen 1992 the subject has received very little empirical attention we provide the first quantitative assessment of the impact of constraints arising from regional property market dynamics on refinancing activity to accomplish this we use a new data set on more than thirty five thousand individual mortgages the sample consists of all mortgages serviced by chemical bank with originations between june 1989 and may 1992

it only takes a few moments to hedge options abstract we propose a novel non structural method for hedging european options relying on two model independent results first under suitable regularity conditions an option price can be disentangled into a linear combination of risk neutral moments second there exists an explicit approximate functional form linking the risk neutral moments to the futures price of the underlying asset and the related variance swap contracts we show that s p 500 call prices are mainly explained by two factors that are related to level and volatility of the underlying index we empirically compare the performance of two strategies where the vega exposure is adjusted either by a direct position in a variance swap contract or indirectly through an at the money call while both strategies ensure effective immunization in periods of market turmoil taking direct exposure on variance swaps is not optimal during extended periods of subdued volatility

reading the wind how middle managers assess the context for selling issues to top managers issue selling is an important mechanism for creating change initiatives in organizations this paper presents two studies that examine what middle managers think about as they decide whether or not to sell strategic issues to top management in study 1 middle managers identify themes that indicate a favorable or unfavorable context for issue selling top management s willingness to listen and a supportive culture were the most often named contributors to context favorability while fear of negative consequences downsizing conditions and uncertainty were thought to signal that a context was unfavorable for issue selling study 2 identifies factors that middle managers associate with image risk in the context of issue selling violating norms for issue selling selling in a politically vulnerable way and having a distant relationship with top management were regarded as major contributors to a middle manager s level of image risk both studies enrich our understanding of the social psychological mechanisms that undergird the strategic change process 1997 by john wiley sons ltd

the pricing of options on assets with stochastic volatilities one option pricing problem that has hitherto been unsolved is the pricing of a european call on an asset that has a stochastic volatility this paper examines this problem the option price is determined in series form for the case in which the stochastic volatility is independent of the stock price numerical solutions are also produced for the case in which the volatility is correlated with the stock price it is found that the black scholes price frequently overprices options and that the degree of overpricing increases with the time to maturity one option pricing problem that has hitherto remained unsolved is the pricing of a european call on a stock that has a stochastic volatility from the work of merton 12 garman 6 and cox ingersoll and ross 3 the differential equation that the option must satisfy is known the solution of this differential equation is independent of risk preferences if a the volatility is a traded asset or b the volatility is uncorrelated with aggregate consumption if either of these conditions holds the risk neutral valuation arguments of cox and ross 4 can be used in a straightfoward way this paper produces a solution in series form for the situation in which the stock price is instantaneously uncorrelated with the volatility we do not assume that the volatility is a traded asset also a constant correlation between the instantaneous rate of change of the volatility and the rate of change of aggregate consumption can be accommodated the option price is lower than the blackscholes b s 1 price when the option is close to being at the money and higher when it is deep in or deep out of the money the exercise prices for which overpricing by b s takes place are within about ten percent of the security price this is the range of exercise prices over which most option trading takes place so we may in general expect the b s price to overprice options this effect is exaggerated as the time to maturity increases one of the most surprising implications of this is that if the b s equation is used to determine the implied volatility of a near the money option the longer the time to maturity the lower the implied volatility numerical solutions for the case in which the volatility is correlated with the stock price are also examined the stochastic volatility problem has been examined by merton 13 geske 7 johnson 10 johnson and shanno 11 eisenberg 5 wiggins 16 and

empirical martingale simulation for asset prices this paper proposes a simple modification to the standard monte carlo simulation procedure for computing the prices of derivative securities the modification imposes the martingale property on the simulated sample paths of the underlying asset price this procedure is referred to as the empirical martingale simulation ems the ems ensures that the price estimated by simulation satisfies the rational option pricing bounds the ems yields a substantial error reduction for the price estimate and can be easily coupled with the standard variance reduction methods simulation studies are conducted for european and asian call options using both the black and scholes and garch option pricing frameworks the results indicate that the ems yields substantial variance reduction particularly for in and at the money or longer maturity options the option price estimate based on the ems is found to exhibit a minor small sample bias only in few occasions an analysis of the trade off between computing time and price accuracy reveals that the ems dominates the conventional simulation methods

some defaults are deeper than others understanding long term mortgage arrears abstract the 2007 2008 financial crisis yielded a significant number of delinquent mortgage loans which ordinarily would have faced foreclosure and repossession however given the negative externalities of repossession policy response has shifted towards forbearance and mortgage modification which has led to longer spells in default for delinquent mortgage holders it is therefore imperative to move beyond binary models of default towards an understanding of the factors that drive the depth of default spells exploiting a highly detailed dataset on financially distressed households in ireland in 2012 and 2013 we are able to identify the impact of a range of current household level factors generally not available in loan level studies of mortgage default on the probability of entering early and deep states of mortgage default our results suggest that high loan to value ratios consumer credit growth shocks to mortgage affordability and unemployment should all trigger serious concerns among policy makers regarding subsequent stability in the mortgage market with these measures all shown to have differentially large impacts on entry to deep relative to early stage arrears

quadratic hedging schemes for non gaussian garch models abstract we propose different schemes for option hedging when asset returns are modeled using a general class of garch models more specifically we implement local risk minimization and a minimum variance hedge approximation based on an extended girsanov principle that generalizes duan s 1995 delta hedge since the minimal martingale measure fails to produce a probability measure in this setting we construct local risk minimization hedging strategies with respect to a pricing kernel these approaches are investigated in the context of non gaussian driven models furthermore we analyze these methods for non gaussian garch diffusion limit processes and link them to the corresponding discrete time counterparts a detailed numerical analysis based on s p 500 european call options is provided to assess the empirical performance of the proposed schemes we also test the sensitivity of the hedging strategies with respect to the risk neutral measure used by recomputing some of our results with an exponential affine pricing kernel

toward a model for international business ethics this paper briefly examines the topic of business ethics and attempts to suggest a code of ethics for multinational firms while most companies have basic policies on employee integrity confidentiality and sexual harassment relatively few have established policies regarding bribery exploitive child labor human rights violations and other issues they may encounter in the global market place drake 1998 until recently very few companies had truly global operations consequently little attention was paid to the issue of ethical guidelines in a global context recent changes in international markets have led to an explosion of corporations with global operations and the need for a global code of ethics has grown commensurately in this paper we explore the issue of global business ethics and attempt to provide a framework for future discussion we also examine some of the unique difficulties surrounding the development of any set of global business standards key among these difficulties is the issue of competing ethical values in home and host countries

default probabilities for mortgages abstract models now exist for valuing the default option embedded in a mortgage implicitly these models generate all the information necessary to determine the probability of default in any possible situation economists and policymakers may find such default probabilities considerably more interesting than the nonobservable dollar value of the default option this paper provides the analytical procedure necessary to calculate such probabilities and presents a wide range of results the decision to terminate a mortgage results in the loss of the options to default or prepay in the future because of this consideration the price of a house must fall below the point of zero equity before a rational borrower defaults we provide evidence that even in the absence of transaction costs this value of delay results in substantial levels of negative equity being observed without default occurring in fact by not accounting for the value of delay most of the current empirical literature cited in this article substantially overestimates the role of transaction costs in the decision to default

implied volatility functions empirical tests derman and kani 1994 dupire 1994 and rubinstein 1994 hypothesize that asset return volatility is a deterministic function of asset price and time and develop a deterministic volatility function dvf option valuation model that has the potential of fitting the observed cross section of option prices exactly using s p 500 options from june 1988 through december 1993 we examine the predictive and hedging performance of the dvf option valuation model and find it is no better than an ad hoc procedure that merely smooths black scholes 1973 implied volatilities across exercise prices and times to expiration

leadership and organizational justice similarities and differences across cultures international management scholars and practitioners agree that managers cannot simply assume that leadership behaviors effective in one culture can be readily transferred to other cultures this study examines the relationship of transformational leadership and leader member exchange to organizational justice and job satisfaction in five separate cultures results indicate that while there is consistent support for some of the proposed linkages there are also some interesting differences across cultures implications for theory and future research on international business are discussed

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

mortgage terminations heterogeneity and the exercise of mortgage options as applied to the behavior of homeowners with mortgages option theoiy predicts that mortgage prepayment or default will be exercised if the call or put option is in the money by some specific amount our analysis tests the extent to which the option approach can explain default and prepayment behavior evaluates the practical importance of modeling both options simultaneouisly and models the unobserved heterogeneity of borrowers in the home mortgage market the paper presents a uinified model of the competing risks of mortgage termination by prepayment and default considering the two hazards as dependent competing risks that are estimated jointly it also accounts for the unobserved heterogeneity among borrowers and estimates the unobserved heterogeneity simultaneously with the parameters and baseline hazards associated with prepayment and default functions our results show that the option model in its most straightfolward version does a good job of explaininig default and prepayment but it is not enouigh by itself the simultaneity of the options is very important empirically in explaining behavior the results also show that there exists significant heterogeneity among mortgage borrowers ignoring this heterogeneity results in serious errors in estimating the prepayment behavior of homeowners

internal net worth and the investment process an application to u s agriculture recent models of firm investment decisions stressing informational imperfections in capital markets provide a foundation for interpreting evidence that movements in internal finance can predict investment spending even after one controls for measures of firms investment opportunities while such evidence is suggestive it is often open to other interpretations we examine these models using data on equipment investment in the u s agricultural sector this sector is particularly interesting because it has experienced large fluctuations in net worth and the profitability of investment and reasonable measures of net worth can be constructed our findings provide support for a class of internal funds models of investment under asymmetric information

the rise and fall of the arm an econometric analysis of mortgage choice this paper estimates an empirical model of the choice between adjustable and fixe d rate mortgages using a large national database compiled by the nat ional association of realtors the explanatory variables in the probi t choice equation include borrower characteristics regional dummies the frm rate and the frm arm rate differential since the intrerest rate on the mortgage not chosen is unobserved this rate must be est imated in a way that eliminates selectivity bias simulation of the e stimated choice equation provides insight into the origin of the arm revolution copyright 1988 by mit press

the rise in student loan defaults abstract we examine the rise in student loan defaults in the great recession by linking administrative student loan data at the individual borrower level to student loan borrowers individual tax records a blinder oaxaca style decomposition shows that shifts in the composition of student loan borrowers and the massive collapse in home prices during the great recession can each account for approximately 30 of the rise in student loan defaults falling home prices affect student loan defaults by impairing individuals labor earnings especially for low income jobs by contrast when comparing the default sensitivities of homeowners and renters we find no evidence that falling home prices affect student loan defaults through a home equity based liquidity channel the income based repayment ibr program introduced by the federal government in the wake of the great recession reduced both student loan defaults and their sensitivity to home price fluctuations thus providing student loan borrowers with valuable insurance against negative shocks

does organizational formalization facilitate voice and helping organizational citizenship behaviors it depends on national uncertainty norms prosocial work behaviors in a globalized environment do not operate in a cultural vacuum we assess to what extent voice and helping organizational citizenship behaviors ocbs vary across cultures depending on employees perceived level of organizational formalization and national uncertainty we predict that in contexts of uncertainty cognitive resources are engaged in coping with this uncertainty organizational formalization can provide structure that frees up cognitive resources to engage in ocb in contrast in contexts of low uncertainty organizational formalization is not necessary for providing structure and may increase constraints on discretionary behavior a three level hierarchical linear modeling analysis of data from 7 537 employees in 267 organizations across 17 countries provides broad support for our hypothesis perceived organizational formalization is weakly related to ocb but where uncertainty is high formalization facilitates voice significantly helping ocb to a lesser extent our findings contribute to clarifying the dynamics between perceptions of norms at organizational and national levels for understanding when employees may engage in helping and voice behaviors the key implication is that managers can foster ocb through organizational formalization interventions in uncertain environments that are cognitively demanding

reconciling theory and empirics on the role of unemployment in mortgage default abstract empirical models of mortgage default typically find that the influence of unemployment is negligible compared to other well known risk factors such as high borrower leverage or low borrower fico scores this is at odds with theory which assigns a critical role to unemployment in the decision to stop payment on a mortgage we help reconcile this divergence by employing a novel empirical strategy involving simulated unemployment histories to measure the severity of attenuation bias in loan level estimations of default risk due to a borrower becoming unemployed attenuation bias results because individual data on unemployment status is unobserved requiring that a market wide unemployment rate be used as a proxy attenuation is extreme with our results suggesting that the use of an aggregate unemployment rate in lieu of actual borrower unemployment status results in default risk from a borrower becoming unemployed being underestimated by a factor more than 100 in addition our analysis indicates that adding the unemployment rate as a proxy for the missing borrower specific unemployment indicator does not improve the accuracy of the estimated model over the specification without the proxy variable included hence aggregate portfolio level risk estimates for mortgage guarantors such as fha also are not improved these views represent those of the authors and not necessarily those of the federal reserve bank of new york or the federal reserve system this is a revised version of a paper that previously circulated under the title unemployment and unobserved credit risk in the fha single family mortgage insurance fund nber working paper no 18880 john grigsby provided excellent research assistance we appreciate the helpful comments of andrew haughwout wilbert van der klaauw the editor stuart rosenthal and referees but remain responsible for any errors

a closed form garch option valuation model this paper develops a closed form option valuation formula for a spot asset whose variance follows a garch p q process that can be correlated with the returns of the spot asset it provides the first readily computed option formula for a random volatility model that can be estimated and implemented solely on the basis of observables the single lag version of this model contains heston s 1993 stochastic volatility model as a continuous time limit empirical analysis on s p500 index options shows that the out of sample valuation errors from the single lag version of the garch model are substantially lower than the ad hoc black scholes model of dumas fleming and whaley 1998 that uses a separate implied volatility for each option to fit to the smirk smile in implied volatilities the garch model remains superior even though the parameters of the garch model are held constant and volatility is filtered from the history of asset prices while the ad hoc black scholes model is updated every period the improvement is largely due to the ability of the garch model to simultaneously capture the correlation of volatility with spot returns and the path dependence in volatility article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

the effect of cultural differences on behavioral responses to low job satisfaction this article reports the results of a field study that evaluated behavioral responses to low job satisfaction of participants in hong kong and new zealand culture measured by vertical and horizontal individualism and collectivism had both main and moderating effects on responses first cultural groups responded differently to low job satisfaction with exit voice loyalty or neglect second culture moderated the effect of quality of job alternatives and job satisfaction on exit and loyalty and moderated the effect of quality of job alternatives on voice

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

the effects of interest rates on mortgage prepayments three main types of mortgages are fixed interest contracts which automatically fall due on the sale of a dwelling fixed rate loans which are assumable by a buyer and floating rate instruments when interest rates rise the fall in the economic value of these assets in savings and loan associations portfolios varies from one form of mortgage to another for either of the fixed interest rate contracts the cash flow from the mortgage is constant as long as it has not been prepaid if the interest rate rises the homeowner has a nominal capital gain since his loan is then at a below market interest rate he would therefore be less likely to prepay the fall in the savings and loans net worth arises from two factors 1 the interest rate differential for mortgages of a fixed duration and 2 the endogenous lengthening of the duration this paper is an attempt to measure the dependence of the duration of mortgages on the implicit unrealized capital gain of mortgage holders resulting from interest rate changes our estimate is based on a sample of 4 000 mortgages issued in california which were active in 1975 we follow their payment history from 1975 to 1982 using a proportional hazards model we estimate the percentage reduction in prepayment probability associated with interest rate changes our results indicate that for due on sale fixed interest rate mortgages a sudden increase in the interest rate from 10 to 15 percent would induce a 23 percent loss in the economic value of the mortgage if the mortgage were assumable this loss would be 28 percent correspondingly the 6 year average time to repayment of mortgages at a constant interest rate would be lengthened to nine years for due on sale mortgages and 13 1 2 years for assumable ones the definitive version is available at www blackwell synergy com this abstract was borrowed from another version of this item

housing price bubbles new supply and within city dynamics abstract although there is broad recognition that cities differ in their tendency to experience house price bubbles most studies assume away any possibility of within city heterogeneity in response to a bubble we develop a model that suggests that this assumption may be appropriate when markets are rising but can be far from reality on the bust side of a bubble during a housing boom new construction and related supply adjustments by developers ensure stable relative prices between low and high quality segments of the housing market on the bust side of a bubble however reduced housing starts allow demand side forces and mortgage default to create pressure for relative prices to diverge across market segments absent a change in technology as markets recover and new construction rebounds relative prices should revert back to pre crash levels evidence based on 2000 2013 single family home sales in phoenix arizona supports this modeling framework additional evidence also suggests that high rates of mortgage default contributed to divergence in relative prices when markets crashed

choosing between fixed and adjustable rate mortgages note introduction in recent years mortgage borrowers have been given a wide variety of financing methods from which to choose e g guttentag 1983 barnett and mckenzie 1984 examples include assumptions adjustable rates shared appreciation growing equity and numerous others by far the dominant two have been the standard fixed rate and the adjustable rate mortgage beginning with regulation changes in 1979 adjustable rate mortgage lending at first was fairly restricted but with the major deregulation change in 1981 the types of adjustable rate mortgages have proliferated 2 now lenders have the flexibility to use numerous indexes including inflation and disposable income indexes make interest rate changes independent of payment changes and allow negative amortization the purpose of this paper is to examine the choice between fixed and adjustable rate mortgages 3 two views have dominated the theoretical literature one that emphasizes the irrelevance of borrower characteristics in the mortgage choice decision given the prices and terms of the contract and one that focuses on the potential impact of borrower characteristics assuming asymmetric information 4 this paper is the first to examine empirically the impact of pricing and borrower characteristics on the choice of mortgage contract

how does home equity affect mobility abstract the impact of the housing crash on household mobility is theoretically ambiguous households that have little or negative equity are less likely to move because the proceeds from the sale of the home may not be large enough to pay off the original mortgage and provide a sufficient down payment on a new home on the other hand at sufficiently negative levels of home equity household mobility may actually increase through the foreclosure channel in this paper we develop and empirically test a model that incorporates both of these mechanisms our empirical results based on data for florida homeowners provide evidence of a non monotonic relationship between home equity and mobility although default induced mobility did increase following the financial crisis this increase did little to offset the substantial decline in voluntary moves due to home equity lock in we find that on net household mobility declined by roughly 25 in our sample because of reductions in equity

unraveling the effects of cultural diversity in teams a meta analysis of research on multicultural work groups previous research on the role of cultural diversity in teams is equivocal suggesting that cultural diversity s effect on teams is mediated by specific team processes and moderated by contextual variables to reconcile conflicting perspectives and past results we propose that cultural diversity affects teams through process losses and gains associated with increased divergence and decreased convergence we examine whether the level surface level vs deep level and type cross national vs intra national of cultural diversity affect these processes differently we hypothesize that task complexity and structural aspects of the team such as team size team tenure and team dispersion moderate the effects of cultural diversity on teams we test the hypotheses with a meta analysis of 108 empirical studies on processes and performance in 10 632 teams results suggest that cultural diversity leads to process losses through task conflict and decreased social integration but to process gains through increased creativity and satisfaction the effects are almost identical for both levels and types of cultural diversity moderator analyses reveal that the effects of cultural diversity vary depending on contextual influences as well as on research design and sample characteristics we propose an agenda for future research and identify implications for managers

model free hedge ratios and scale invariant models a price process is scale invariant if and only if the returns distribution is independent of the price measurement scale we show that most stochastic processes used for pricing options on financial assets have this property and that many models not previously recognised as scale invariant are indeed so we also prove that price hedge ratios for a wide class of contingent claims under a wide class of pricing models are model free in particular previous results on model free price hedge ratios of vanilla options based on scale invariant models are extended to any contingent claim with homogeneous pay off including complex path dependent options however model free hedge ratios only have the minimum variance property in scale invariant stochastic volatility models when price volatility correlation is zero in other stochastic volatility models and in scale invariant local volatility models model free hedge ratios are not minimum variance ratios and our empirical results demonstrate that they are less efficient than minimum variance hedge ratios

leader openness nationality dissimilarity and voice in multinational management teams we argue that leader directed voice i e communicating critical suggestions for change to the leader is a relational phenomenon and that it is affected by an inherent feature of multinational teams members dis similarities in nationality we tested our hypotheses in a sample of middle managers who were working in multinational teams the results of this study show that leaders of multinational teams are more likely to profit from the local know how of employees from underrepresented nationalities when they are open to their ideas and when they have the same nationality the study also shows that the effects of being open to employees ideas and sharing the same nationality are mediated by affective commitment and psychological safety respectively we discuss how even though the current relational demography perspective with its dichotomous understanding of dis similarity is not suited to capture the dynamics of cultural differences it does set the stage for future studies to examine the cultural dynamics behind an individual s experience of being different from other team members in multinational teams we also discuss the practical implications of these findings for multinational companies

a profitable modification to global quadratic hedging abstract recent research has shown that global quadratic hedging also known as variance optimal hedging and mean variance hedging can significantly reduce the risk of hedging call and put options with long term maturities one year or more such as long term equity anticipation securities leaps we propose a modification to global quadratic hedging that is more profitable on average to the hedger without substantially increasing his downside hedging risk if at all we prove mathematically that the expected terminal hedging gain of our modified strategy is greater than that of the global quadratic hedging strategy the performance of our strategy is evaluated under simulated return paths from garch regime switching and jump diffusion models and under empirical s p 500 return paths

unemployment insurance and unemployment spells this paper tests the effects of the level and length of unemployment insurance benefits on unemployment durations the paper particularly studies individual behavior during the weeks just prior to when benefits lapse higher unemployment insurance benefits are found to have a strong negative effect on the probability of leaving unemployment however the probability of leaving unemployment rises dramatically just prior to when benefits lapse individual data are used with accurate information of spell durations and the level and length of benefits the semiparametric estimation techniques used in the paper yield more plausible estimates than conventional approaches and provide useful diagnostics copyright 1990 by the econometric society

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

what triggers mortgage default this paper assesses the relative importance of two key drivers of mortgage default negative equity and illiquidity to do so the authors combine loan level mortgage data with detailed credit bureau information about the borrower s broader balance sheet this gives them a direct way to measure illiquid borrowers those with high credit card utilization rates the authors find that both negative equity and illiquidity are significantly associated with mortgage default with comparably sized marginal effects moreover these two factors interact with each other the effect of illiquidity on default generally increases with high combined loan to value ratios cltv though it is significant even for low cltv county level unemployment shocks are also associated with higher default risk though less so than high utilization and strongly interact with cltv in addition having a second mortgage implies significantly higher default risk particularly for borrowers who have a first mortgage ltv approaching 100 percent this abstract was borrowed from another version of this item