Unemployment, Negative Equity, and Strategic Default

by Sabrina I. Pacifici on August 11, 2013

Unemployment, Negative Equity, and Strategic Default – Kristopher Gerardi, Kyle F. Herkenhoff, Lee E. Ohanian, and Paul S. Willen. Federal Reserve Bank of Atlanta. Working Paper 2013-4. August 2013

“Using new household-level data, we quantitatively assess the roles that job loss, negative equity, and wealth (including unsecured debt, liquid assets, and illiquid assets) play in default decisions. In sharp contrast to prior studies that proxy for individual unemployment status using regional unemployment rates, we find that individual unemployment is the strongest predictor of default. We find that individual unemployment increases the probability of default by 5–13 percentage points, ceteris paribus, compared with the sample average default rate of 3.9 percent. We also find that only 13.9 percent of defaulters have both negative equity and enough liquid or illiquid assets to make one month’s mortgage payment. This finding suggests that “ruthless” or “strategic” default during the 2007–09 recession was relatively rare and that policies designed to promote employment, such as payroll tax cuts, are most likely to stem defaults in the long run rather than policies that temporarily modify mortgages.”

Previous post:

Next post: