Default, Mortgage Standards and Housing Liquidity

Allen Head (), Hongfei Sun and Chenggang Zhou

No 274685, Queen's Economics Department Working Papers from Queen's University - Department of Economics

Abstract: The effects of households'indebtedness on their house-selling decisions are studied in a dynamic equilibrium model with search in the housing market and defaultable long-term mortgages. In equilibrium, both sellers' asking prices and time-to-sell increase with the relative size of their outstanding mortgages. In turn, the liquidity of the housing market associated with time-to-sell determines the mortgage standards of competitive lenders, measured by the maximum loan-to-value (LTV) ratio offered at origination. Calibrated to the U.S. economy, the model generates, as observed, positive correlations over time between house prices and LTV's at origination and across sellers among asking prices, time-to-sell, and LTV's outstanding.

Keywords: Consumer/Household Economics; Financial Economics (search for similar items in EconPapers)
Pages: 57
Date: 2016-06
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Related works:
Working Paper: Default, Mortgage Standards And Housing Liquidity (2016)
Working Paper: Default, Mortgage Standards, and Housing Liquidity (2016)
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Persistent link: https://EconPapers.repec.org/RePEc:ags:quedwp:274685

DOI: 10.22004/ag.econ.274685

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