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Mortgage defaults

Juan Carlos Hatchondo, Leonardo Martinez and Juan Sanchez

Journal of Monetary Economics, 2015, vol. 76, issue C, 173-190

Abstract: A life-cycle model is developed in which households face income and house-price risk and buy houses with mortgages. This model, which accounts for key features in U.S. data, is used as a laboratory for prudential policy. Recourse mortgages increase the cost of default but also lower equity and increase payments. The effect on default is nonmonotonic. Loan-to-value (LTV) limits increase equity and lower the default rate, with negligible effects on housing demand. Combining recourse mortgages and LTV limits reduces the default rate while boosting housing demand. Together, they also prevent spikes in default after large declines in aggregate house prices.

Keywords: Mortgage; Default; Recourse; LTV; Housing risk (search for similar items in EconPapers)
Date: 2015
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