Mortgage defaults |
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| Institution: | 2. University of Virginia, Darden School of Business, 100 Darden Blvd, Charlottesville, VA 22903, USA;1. Department of Mathematics, University of Oslo, Niels Henrik Abels hus Moltke Moes vei 35, Oslo 0851, Norway;2. Statistical Analysis, Machine Learning and Image Analysis, Norwegian Computing Center, Gaustadalleen 23a, Oslo 0373, Norway;3. Group Risk Modelling, DNB ASA, Dronning Eufemias gate 30, Oslo 0191, Norway |
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| Abstract: | A life-cycle model is developed in which households face income and house-price risk and buy houses with mortgages. This model, which accounts for key features in U.S. data, is used as a laboratory for prudential policy. Recourse mortgages increase the cost of default but also lower equity and increase payments. The effect on default is nonmonotonic. Loan-to-value (LTV) limits increase equity and lower the default rate, with negligible effects on housing demand. Combining recourse mortgages and LTV limits reduces the default rate while boosting housing demand. Together, they also prevent spikes in default after large declines in aggregate house prices. |
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| Keywords: | Mortgage Default Recourse LTV Housing risk |
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