EconPapers    
Economics at your fingertips  
 

Negative equity and foreclosure: Theory and evidence

Christopher Foote (), Kristopher Gerardi () and Paul S. Willen

Journal of Urban Economics, 2008, vol. 64, issue 2, 234-245

Abstract: Recent declines in housing prices have focused attention on the relationship between negative housing equity and mortgage default. Theory implies that negative equity is a necessary condition for default, but not a sufficient one. This often-misunderstood result is clearly illustrated in a dataset of Massachusetts homeowners during the early 1990s; fewer than 10 percent of borrowers likely to have had negative equity at the end of 1991 experienced a foreclosure during the following three years. An econometric model of default estimated on two decades of Massachusetts housing data also predicts low default rates for current negative-equity borrowers. We develop a simple theoretical model to interpret these empirical findings and to assess potential foreclosure-reduction policies. Our results imply that lenders and policymakers face an information problem in trying to help borrowers with negative equity, because it is hard to determine which owners really need help in order to stay in their homes.

Date: 2008
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (213) Track citations by RSS feed

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0094-1190(08)00067-3
Full text for ScienceDirect subscribers only

Related works:
Working Paper: Negative equity and foreclosure: theory and evidence (2008) Downloads
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:juecon:v:64:y:2008:i:2:p:234-245

Access Statistics for this article

Journal of Urban Economics is currently edited by S.S. Rosenthal and W.C. Strange

More articles in Journal of Urban Economics from Elsevier
Bibliographic data for series maintained by Dana Niculescu ().

 
Page updated 2019-04-24
Handle: RePEc:eee:juecon:v:64:y:2008:i:2:p:234-245