Tuesday, October 13, 2015

NBER Paper: "Strategic default rarely occurs"

by Bill McBride on 10/13/2015 06:58:00 PM

Ht to Nick Timiraos for link to the paper.

An NBER paper from Kristopher Gerardi, Kyle F. Herkenhoff, Lee E. Ohanian, and Paul S. Willen Can’t Pay or Won’t Pay? Unemployment, Negative Equity, and Strategic Default

On the flip side we find that less than 1 percent of “can pay” households, which we define to be households that are employed and have at least 6 months worth of mortgage payments in stock, bonds, or liquid assets (net of unsecured debt) are in default. Conditioning on negative equity does not have much effect as only 5 percent of “can pay” borrowers with negative equity are in default. Thus, the vast majority of borrowers in positions of negative equity continue paying their mortgages, which suggests that strategic default rarely occurs.
Not a surprise. The researchers also found the opposite - that most people with few assets, negative equity and unemployed - still finds ways to make their mortgage payments.
Suppose we define “can’t pay” to be households without a job and with less than one month of mortgage payments in stock, bonds, or liquid assets (net of unsecured debt). The data show that approximately 19 percent of these “can’t pay households” are in default as compared to only 4 percent in the population as a whole. What is surprising though is the flip side of that 19 percent: 81 percent of “can’t pay” households are current on their loans. In other words, despite no income and no savings, most households in this group continue to pay their mortgages. Furthermore, we show that these striking patterns remain even when conditioning on negative equity.
• At 7:00 AM ET, the Mortgage Bankers Association (MBA) will release the results for the mortgage purchase applications index.

• At 8:30 AM, the Producer Price Index for September from the BLS. The consensus is for a 0.2% decrease in prices, and a 0.1% increase in core PPI.

• Also at 8:30 AM, Retail sales for September will be released. The consensus is for retail sales to increase 0.1% in September, and to decrease 0.1% ex-autos.

• At 10:00 AM, Manufacturing and Trade: Inventories and Sales (business inventories) report for August. The consensus is for no change in inventories.

• At 2:00 PM, the Federal Reserve Beige Book, an informal review by the Federal Reserve Banks of current economic conditions in their Districts.