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Equity and Nonequity Determinants of FHA Single‐Family Mortgage Foreclosures in the 1980s

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  • Patric H. Hendershott
  • William R. Schultz

Abstract

We examine foreclosures on FHA single‐family mortgages insured during the 1975–87 period. The importance of the market value of borrower equity and national house price dispersion support much earlier work emphasizing the key role of negative equity in triggering default. The lower is “mean” market‐value equity, and the greater is dispersion, the greater is the fraction of borrowers likely to have negative equity. The unemployment rate and the book value of borrower equity are also shown to be significant determinants of default. Unemployment is one of those events that can force borrowers to move. The moving decision increases the likelihood of default because moving costs no longer deter default, and the costs of selling the house reduce the effective equity in the house. The book value of equity is relevant to this decision because it is what the sellers receive if they move without defaulting. Not only are both of these variables significant determinants of default, but the smaller is book equity, the greater is employment impact (with large book equity, unemployment should not matter because selling the house is preferred to default).

Suggested Citation

  • Patric H. Hendershott & William R. Schultz, 1993. "Equity and Nonequity Determinants of FHA Single‐Family Mortgage Foreclosures in the 1980s," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 21(4), pages 405-430, December.
  • Handle: RePEc:bla:reesec:v:21:y:1993:i:4:p:405-430
    DOI: 10.1111/1540-6229.00618
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    References listed on IDEAS

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    1. S. Michael Giliberto & Arthur L. Houston, 1989. "Relocation Opportunities and Mortgage Default," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 17(1), pages 55-69, March.
    2. Chester Foster & Robert Van Order, 1985. "FHA Terminations: A Prelude to Rational Mortgage Pricing," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 13(3), pages 273-291, September.
    3. Hendershott, Patric H & Waddell, James A, 1992. "The Changing Fortunes of FHA's Mutual Mortgage Insurance Fund and the Legislative Response," The Journal of Real Estate Finance and Economics, Springer, vol. 5(2), pages 119-132, June.
    4. Donald F. Cunningham & Patric H. Hendershott, 1984. "Pricing FHA Mortgage Default Insurance," NBER Working Papers 1382, National Bureau of Economic Research, Inc.
    5. Kerry D. Vandell & Thomas Thibodeau, 1985. "Estimation of Mortgage Defaults Using Disaggregate Loan History Data," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 13(3), pages 292-316, September.
    6. Patric H. Hendershott, 1985. "Pricing Adjustable Rate Mortgages," NBER Working Papers 1548, National Bureau of Economic Research, Inc.
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    Cited by:

    1. Xudong An & Yongheng Deng & Eric Rosenblatt & Vincent Yao, 2012. "Model Stability and the Subprime Mortgage Crisis," The Journal of Real Estate Finance and Economics, Springer, vol. 45(3), pages 545-568, October.
    2. Hendershott, Patric H., 1996. "Introduction and overview," Regional Science and Urban Economics, Elsevier, vol. 26(3-4), pages 227-234, June.
    3. Hyeongjun Kim & Hoon Cho & Doojin Ryu, 2018. "Characteristics of Mortgage Terminations: an Analysis of a Loan-Level Dataset," The Journal of Real Estate Finance and Economics, Springer, vol. 57(4), pages 647-676, November.
    4. George H. Lentz & Ko Wang, 1998. "Residential Appraisal and the Lending Process: A Survey of Issues," Journal of Real Estate Research, American Real Estate Society, vol. 15(1), pages 11-40.
    5. Sumit Agarwal & Chunlin Liu, 2003. "Determinants of credit card delinquency and bankruptcy: Macroeconomic factors," Journal of Economics and Finance, Springer;Academy of Economics and Finance, vol. 27(1), pages 75-84, March.
    6. Samir Amine & Wilner Predelus, 2019. "The Persistence of the 2008-2009 Recession and Insolvency Filings in Canada," Economics Bulletin, AccessEcon, vol. 39(1), pages 84-93.
    7. Moon, Byunggeor, 2018. "Housing investment, default risk, and expectations: Focusing on the chonsei market in Korea," Regional Science and Urban Economics, Elsevier, vol. 71(C), pages 80-90.
    8. Timothy Jones & Dean Gatzlaff & G. Stacy Sirmans, 2016. "Housing Market Dynamics: Disequilibrium, Mortgage Default, and Reverse Mortgages," The Journal of Real Estate Finance and Economics, Springer, vol. 53(3), pages 269-281, October.

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    More about this item

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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