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Can’t Pay or Won’t Pay? Unemployment, Negative Equity, and Strategic Default

Kristopher Gerardi, Kyle Herkenhoff, Lee Ohanian and Paul Willen

The Review of Financial Studies, 2018, vol. 31, issue 3, 1098-1131

Abstract: This paper uses new data from the PSID to quantify the relative importance of negative equity versus ability to pay, in driving mortgage defaults between 2009 and 2013. These data allow us to construct household budgets sets that provide better measures of ability to pay. Changes in ability to pay have large estimated effects. Job loss has an equivalent effect on the propensity to default as a 35% decline in equity. Strategic motives are also found to be quantitatively important, as we estimate more than 38% of households in default could make their mortgage payments without reducing consumption. Received September 29, 2015; editorial decision June 2, 2017 by Editor Philip Strahan. Authors have furnished an Internet Appendix, which is available on the Oxford University PressWeb site next to the link to the final published paper online.

Date: 2018
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Citations: View citations in EconPapers (29)

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Working Paper: Can't pay or won't pay?: unemployment, negative equity, and strategic default (2015) Downloads
Working Paper: Can't Pay or Won't Pay? Unemployment, Negative Equity, and Strategic Default (2015) Downloads
Working Paper: Can't Pay or Won't Pay? Unemployment, Negative Equity, and Strategic Default (2013) Downloads
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