The Journal of Real Estate Finance and Economics

, Volume 46, Issue 2, pp 355–378

Residential Mortgage Default: The Roles of House Price Volatility, Euphoria and the Borrower’s Put Option

Article

Abstract

House price volatility; lender and borrower perception of price trends, loan and property features; and the borrower’s put option are integrated in a model of residential mortgage default. These dimensions of the default problem have, to our knowledge, not previously been considered altogether within the same investigation framework. We rely on a sample of individual mortgage loans for 20 counties in Florida, over the period 2001 through 2008, third quarter, with housing price performance obtained from repeat sales analysis of individual transactions. The results from the analysis strongly confirm the significance of the borrower’s put as an operative factor in default. At the same time, the results provide convincing evidence that the experience in Florida is in part driven by lenders and purchasers exhibiting euphoric behavior such that in markets with higher price appreciation there is a willingness to accept recent prior performance as an indicator of future risk. This connection illustrates a familiar moral hazard in the housing market due to the limited information about future prices.

Keywords

Residential mortgage default Risk Lending Housing economics Mortgage underwriting 

JEL

G21 R11 R20 R21 

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Copyright information

© Springer Science+Business Media, LLC 2011

Authors and Affiliations

  1. 1.Warrington College of Business Administration Department of Finance Insurance & Real EstateWachovia Fellow University of FloridaGainesvilleUSA
  2. 2.Department of Finance Insurance and Real Estate, Snead School of BusinessVirginia Commonwealth UniversityRichmondUSA

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