Default, Mortgage Standards And Housing Liquidity

Allen Head (), Amy Hongfei Sun () and Chenggang Zhou
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Chenggang Zhou: University of Waterloo

No 1359, Working Paper from Economics Department, Queen's University

Abstract: The effects of households' indebtedness on their house-selling decisions are studied in a dynamic equilibrium model with search in the housing market and defaultable long-term mortgages. In equilibrium, both sellers' asking prices and time-to-sell increase with the relative size of their outstanding mortgages. In turn, the liquidity of the housing market associated with time-to-sell determines the mortgage standards of competitive lenders, measured by the maximum loan-to-value (LTV) ratio offered at origination. Calibrated to the U.S. economy, the model generates, as observed, positive correlations over time between house prices and LTV's at origination and across sellers among asking prices, time-to-sell, and LTV's outstanding.

Keywords: Block Recursive Equilibrium; Housing; Mortgages; Foreclosures; Directed Search; Liquidity (search for similar items in EconPapers)
JEL-codes: E30 G21 R10 R31 (search for similar items in EconPapers)
Pages: 56 pages
Date: 2016-06
New Economics Papers: this item is included in nep-ban, nep-dge and nep-ure
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (6)

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https://www.econ.queensu.ca/sites/econ.queensu.ca/files/qed_wp_1359.pdf First version 2016 (application/pdf)

Related works:
Working Paper: Default, Mortgage Standards, and Housing Liquidity (2016)
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Persistent link: https://EconPapers.repec.org/RePEc:qed:wpaper:1359

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