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An IV Hazard Model of Loan Default with an Application to Subprime Mortgage Cohorts

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  • Christopher Palmer

Abstract

This paper develops a control-function methodology accounting for endogenous or mismeasured regressors in hazard models. I provide sufficient identifying assumptions and regularity conditions for the estimator to be consistent and asymptotically normal. Applying my estimator to the subprime mortgage crisis, I quantify what caused the foreclosure rate to triple across the 2003-2007 subprime cohorts. To identify the elasticity of default with respect to housing prices, I use various home-price instruments including historical variation in home-price cyclicality. Loose credit played a significant role in the crisis, but much of the increase in defaults across cohorts was caused by home-price declines unrelated to lending standards, with a 10% decline in home prices increasing subprime mortgage default rates by 50%.

Suggested Citation

  • Christopher Palmer, 2023. "An IV Hazard Model of Loan Default with an Application to Subprime Mortgage Cohorts," NBER Working Papers 32000, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:32000
    Note: AP CF EFG LE LS PE TWP
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    More about this item

    JEL classification:

    • C26 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Instrumental Variables (IV) Estimation
    • C41 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - Duration Analysis; Optimal Timing Strategies
    • G01 - Financial Economics - - General - - - Financial Crises
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • R31 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Real Estate Markets, Spatial Production Analysis, and Firm Location - - - Housing Supply and Markets
    • R38 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Real Estate Markets, Spatial Production Analysis, and Firm Location - - - Government Policy

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