A Dynamic Model of Subprime Mortgage Default: Estimation and Policy Implications

Patrick Bajari, Chenghuan Sean Chu, Denis Nekipelov () and Minjung Park ()

No 18850, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: The increase in defaults in the subprime mortgage market is widely held to be one of the causes behind the recent financial turmoil. Key issues of policy concern include quantifying the role of various factors, such as home price declines and loosened underwriting standards, in the recent increase in subprime defaults and predicting the effects of various policy instruments designed to mitigate default. To address these questions, we estimate a dynamic structural model of subprime borrowers' default behavior. We prove that borrowers' time preference is identified in our model and propose an easily implementable semiparametric plug-in estimator. Our results show that principal writedowns have a significant effect on borrowers' default behavior and welfare: a uniform 10% reduction in outstanding mortgage balance for the pool of borrowers in our sample would reduce the overall default probability by 22%, and borrowers' average willingness to pay for the principal writedown would be $16,643

JEL-codes: C14 C5 G21 (search for similar items in EconPapers)
Date: 2013-02
New Economics Papers: this item is included in nep-ban
Note: IO
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Citations: View citations in EconPapers (12)

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