Mortgage Default in an Estimated Model of the U.S. Housing Market

Lambertini Luisa, Victoria Nuguer and Pinar Uysal

No 2017-06, Working Papers from Banco de México

Abstract: This paper models the housing sector, mortgages and endogenous default in a DSGE setting with nominal and real rigidities. We use data for the period 1981-2006 to estimate our model using Bayesian techniques. We analyze how an increase in risk in the mortgage market raises the default rate and spreads to the rest of the economy, creating a recession. In our model two shocks are well suited to replicate the subprime crisis and the Great Recession: the mortgage risk shock and the housing demand shock. Next we use our estimated model to evaluate a policy that reduces the principal of underwater mortgages. This policy is successful in stabilizing the mortgage market and makes all agents better off.

Keywords: Housing; Mortgage Default; DSGE model; Bayesian Estimation (search for similar items in EconPapers)
JEL-codes: C11 E44 G01 G21 (search for similar items in EconPapers)
Date: 2017-06
New Economics Papers: this item is included in nep-dge, nep-mac, nep-rmg and nep-ure
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (17)

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Journal Article: Mortgage default in an estimated model of the U.S. housing market (2017)
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Persistent link: https://EconPapers.repec.org/RePEc:bdm:wpaper:2017-06

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