Dynamics of Unemployment and Home Price Shocks on Mortgage Default Rates

Abstract

This paper uses a Structural Vector Autoregression (SVAR) model to study the dynamics of the impact of unemployment and home price index shocks on mortgage default rates from 1979 to 2000 and from 2001 to 2010. We first fit the model to the 1979 to 2000 sample and forecast the changes in the national and regional mortgage default rates from 2001 to 2010. The model did a good job in forecasting the actual changes in the mortgage default rates from 2001 to 2007; however, it failed during 2008 to 2010. The results for the 1979 to 2000 and 2001 to 2010 periods indicate that the dynamic response of the mortgage default rate to unemployment and home price index shocks changed at the national, regional and state levels after 2000. Unemployment and home price shocks seem to have become more important during the 2001 to 2010 period. The two shocks are responsible on average for about 60% of the movement in the regional mortgage default rates during this period. Except for the Pacific region, California and Florida, most of the variations in the mortgage default rates at the national, regional and state levels are explained by the unemployment shocks. The post 2000 results could be attributed to the increase in the number of mortgage loan borrowers who were more susceptible to unemployment and negative home price shocks.