An IV Hazard Model of Loan Default with an Application to Subprime Mortgage Cohorts

Christopher Palmer

No 32000, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: This paper develops a control-function methodology accounting for endogenous or mismeasured regressors in hazard models. I provide sufficient identifying assumptions and regularity conditions for the estimator to be consistent and asymptotically normal. Applying my estimator to the subprime mortgage crisis, I quantify what caused the foreclosure rate to triple across the 2003-2007 subprime cohorts. To identify the elasticity of default with respect to housing prices, I use various home-price instruments including historical variation in home-price cyclicality. Loose credit played a significant role in the crisis, but much of the increase in defaults across cohorts was caused by home-price declines unrelated to lending standards, with a 10% decline in home prices increasing subprime mortgage default rates by 50%.

JEL-codes: C26 C41 G01 G21 R31 R38 (search for similar items in EconPapers)
Date: 2023-12
New Economics Papers: this item is included in nep-ban, nep-ecm and nep-ure
Note: AP CF EFG LE LS PE TWP
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