Year: 2018
Type: article
Abstract: Which theory can quantitatively explain the rise in mortgage defaults during the U.S. mortgage crisis? This paper finds that the double‐trigger hypothesis, which attributes mortgage default to the joint occurrence of negative equity and a life event such as unemployment, is consistent with the evidence. By contrast, a traditional frictionless default model strongly overpredicts the increase in default rates. This paper provides microfoundations for double‐trigger behavior in a model where unemployment causes liquidity problems for the borrower. This framework implies that mortgage crises may be mitigated at a lower cost by bailing out borrowers instead of lenders.
DOI: 10.1111/jmcb.12546
Author: THOMAS SCHELKLE
Institution: London School of Economics and Political Science
Language: English
Topic: Housing Market and Economics
Subfield: Economics and Econometrics
Domain: Social Sciences
Open Access status: bronze
OpenAlex ID: W1516482519