Downpayment, mobility and default: A welfare analysis

Ayman Mnasri

Journal of Macroeconomics, 2018, vol. 55, issue C, 235-252

Abstract: In this paper, I study the impact of the relaxation of downpayment requirements on home-ownership and default risk in the context of a static spatial life cycle model. Given its quantitative success in matching the U.S. home-ownership curve, my model represents a reasonable benchmark for assessing the efficiency of mortgage default prevention policies. I find that both income and geographical mobility are the main trigger factors for default decisions. In fact, households with a higher mobility (i.e. young households) rate are more likely to default. According to the welfare analysis, I suggest that policymakers include a minimum downpayment requirement of 9.5% in the new definition of the Qualified Residential Mortgage (QRM). This number should, however, be viewed with some caution, since I focus on a steady-state economy, in which house prices are constant. In fact, house prices represent an important factor influencing the default rate. Potentially, the optimal minimum downpayment requirement should be set at a higher value than 9.5%.

Date: 2018
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Citations: View citations in EconPapers (3)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jmacro:v:55:y:2018:i:c:p:235-252

DOI: 10.1016/j.jmacro.2017.11.001

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