Reducing residential mortgage default: Should policy act before or after home purchases?

Yifei Wu and Jeffrey Dorfman ()

PLOS ONE, 2018, vol. 13, issue 7, 1-23

Abstract: We examine two possible approaches to reducing residential mortgage default using a dynamic model of heterogeneous infinitely-lived agents acting optimally subject to uninsurable idiosyncratic earnings shocks and systemic house price shocks. We find higher down payments are very effective in minimizing residential mortgage foreclosures, even in periods of house price declines and recessions. In contrast, the length of the credit exclusionary period for people who experience bankruptcy or foreclosure has a much smaller impact on mortgage defaults. Thus, it is much more effective to prevent mortgage default before the mortgage closes than to pressure homeowners not to default once they are in financial trouble. This also suggests a major aspect of credit scores and credit policy is non-productive and punitive, harming people in return for little societal gain.

Date: 2018
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Persistent link: https://EconPapers.repec.org/RePEc:plo:pone00:0200476

DOI: 10.1371/journal.pone.0200476

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