Substantial research and debate have focused on how housing policy, the financial markets, and de-regulation contributed to the 2000s mortgage crisis. But what about the behavior of borrowers? Specifically, did borrowers’ reaction to negative equity vary over the crisis period and in response to government policy?
Default is importantly driven by homeowner negative equity. However, borrowers do not always default when facing negative equity. Little is known about the time variation or drivers of borrower propensity to default. For example, do borrowers exercise the default option more ruthlessly during a period of economic weakness? If so, could such changes in behavior materially worsen mortgage outcomes and exacerbate the market downturn?
In the June 2015 UCLA Economic Letter, UCLA Ziman Center Director Stuart Gabriel and his co-authors, Xudong An (SDSU) and Yongheng Deng (NUS-IRES), analyze how borrowers' exercise of the mortgage default option shifts over the economic cycle and in response to government policy. Read more...
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