Published in:Consumer Financial Protection Bureau Office of Research Working Paper ; No. 2021-01
Extent:
1 Online-Ressource (70 p)
Language:
English
DOI:
10.2139/ssrn.3974020
Identifier:
Origination:
Footnote:
Nach Informationen von SSRN wurde die ursprüngliche Fassung des Dokuments March 31, 2022 erstellt
Description:
Many struggling mortgage borrowers who have home equity lose it through foreclosure. To explainwhy they do not just sell their homes instead, this paper develops a new model of mortgage default in which homeowners face psychic moving costs. A transparent calibration procedure yields psychic moving costs that are empirically accurate, heterogeneous, and large. The model explains abovewater default: after a liquidity shock, abovewater homeowners often default rather than sell in an ex-ante optimal gamble to avoid moving. Psychic moving costs also mostly explain why underwater borrowers so rarely walk away from their homes, another major puzzle in the literature. Relative to a nested model without abovewater default, the full model produces starkly different results in policy experiments. Wealth maximization motivates many fewer defaults, so suing defaulters prevents less than one-fifth as many foreclosures after a drop in house prices. But liquidity constraints alone drive many more defaults, so forbearance prevents between three and seven times more foreclosures after a drop in aggregate income