Abstract
How do households make optimal borrowing and default decisions when they have the option to borrow in multiple ways? In this paper, I analyze households' optimal mortgage and unsecured loan borrowing and default decisions in the context of the recent recession. I model households as able to default on mortgage debt to walk away from capital losses, at the price of foreclosure. However, a household can also default on unsecured debt to maintain its home, in exchange for a longer exclusion from credit markets following default. Depending on the costs of each alternative, financially constrained households exhibit heterogeneity in optimal default decisions.Next, I analyze how mortgage loan modification policies, after a sudden drop in house prices, affect household choices in the mortgage and unsecured loan markets. The quantitative exercise shows that the government-driven mortgage modification program, initiated in 2009, reduces the mortgage default rate by 0.27% points. However, this increases the unsecured loan charge-off rate by 0.66% points.
| Original language | English |
|---|---|
| Pages (from-to) | 222-244 |
| Number of pages | 23 |
| Journal | Journal of Macroeconomics |
| Volume | 45 |
| DOIs | |
| Publication status | Published - 2015 Sep 1 |
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All Science Journal Classification (ASJC) codes
- Economics and Econometrics
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Household's optimal mortgage and unsecured loan default decision. / Kim, Jiseob.
In: Journal of Macroeconomics, Vol. 45, 01.09.2015, p. 222-244.Research output: Contribution to journal › Article
TY - JOUR
T1 - Household's optimal mortgage and unsecured loan default decision
AU - Kim, Jiseob
PY - 2015/9/1
Y1 - 2015/9/1
N2 - How do households make optimal borrowing and default decisions when they have the option to borrow in multiple ways? In this paper, I analyze households' optimal mortgage and unsecured loan borrowing and default decisions in the context of the recent recession. I model households as able to default on mortgage debt to walk away from capital losses, at the price of foreclosure. However, a household can also default on unsecured debt to maintain its home, in exchange for a longer exclusion from credit markets following default. Depending on the costs of each alternative, financially constrained households exhibit heterogeneity in optimal default decisions.Next, I analyze how mortgage loan modification policies, after a sudden drop in house prices, affect household choices in the mortgage and unsecured loan markets. The quantitative exercise shows that the government-driven mortgage modification program, initiated in 2009, reduces the mortgage default rate by 0.27% points. However, this increases the unsecured loan charge-off rate by 0.66% points.
AB - How do households make optimal borrowing and default decisions when they have the option to borrow in multiple ways? In this paper, I analyze households' optimal mortgage and unsecured loan borrowing and default decisions in the context of the recent recession. I model households as able to default on mortgage debt to walk away from capital losses, at the price of foreclosure. However, a household can also default on unsecured debt to maintain its home, in exchange for a longer exclusion from credit markets following default. Depending on the costs of each alternative, financially constrained households exhibit heterogeneity in optimal default decisions.Next, I analyze how mortgage loan modification policies, after a sudden drop in house prices, affect household choices in the mortgage and unsecured loan markets. The quantitative exercise shows that the government-driven mortgage modification program, initiated in 2009, reduces the mortgage default rate by 0.27% points. However, this increases the unsecured loan charge-off rate by 0.66% points.
UR - http://www.scopus.com/inward/record.url?scp=84939474197&partnerID=8YFLogxK
UR - http://www.scopus.com/inward/citedby.url?scp=84939474197&partnerID=8YFLogxK
U2 - 10.1016/j.jmacro.2015.05.002
DO - 10.1016/j.jmacro.2015.05.002
M3 - Article
VL - 45
SP - 222
EP - 244
JO - Journal of Macroeconomics
JF - Journal of Macroeconomics
SN - 0164-0704
ER -