Underwater Mortgages Research Articles

Mortgage prepayments and tax‐exempted intergenerational transfers: from rich parents to rich children?

The Dutch government implemented two changes to the taxation of intergenerational transfers aimed at mortgage down payments and prepayments. We identify the effects of these tax exemptions on prepayments and inter vivos transfers separately by taking advantage of the changes in policy design. The policy changes resulted in two expansions of tax‐exempt transfers, which increased the probability of receiving such transfers, translating into a modest increase in prepayments. Initially, the amounts prepaid increased by a similar magnitude, while the second policy change only resulted in an increase in the amounts being transferred but not the prepayments. The macroprudential policy goal was to reduce the number of underwater mortgages, but the policy was too generic and did not help to achieve this. The prepayments triggered by the policy change increased mostly for borrowers with low original loan‐to‐value ratios, implying that most transfers were made from wealthy parents to housing‐rich children.

Flooded House or Underwater Mortgage? The Implications of Climate Change and Adaptation on Housing, Income, and Wealth

Flooded House or Underwater Mortgage? The Implications of Climate Change and Adaptation on Housing, Income, and Wealth

Default Costs and Repayment of Underwater Mortgages

Default Costs and Repayment of Underwater Mortgages

Discussion of Dhaliwal, Goodman, Hoffman, and Schwab (2019): Revisiting Tax-Related Reputational Costs

Discussion of Dhaliwal, Goodman, Hoffman, and Schwab (2019): Revisiting Tax-Related Reputational Costs

Impact of financial debt on borrower’s health based on gender

AbstractThis study investigated whether self‐reported impact of financial debt on health is different for women as compared with men. We found that female respondents are more likely to report that debt has affected their health. The results persisted when the analysis was performed on subsamples of employed individuals, married households and those with underwater mortgage (i.e., outstanding balance on mortgage is higher than the current value of the home). Prior studies have found that for a given level of debt, females are more likely to perceive higher levels of stress. When we controlled for stress perception, the health impact of debt was not higher for females. Some types of debt like credit card debt, student debt and loans from friends and family are known to result in higher levels of stress. Our findings persisted when we limited our sample to top users of credit card debt, to those with student debt or to those with loan(s) from friends and family. Prior studies have shown that mortgage debt is associated with lower levels of stress as compared with other types of debt. We found that in households with underwater mortgage, health impact of debt was higher for females even after we accounted for gender differential in stress perception. Our findings suggest that women’s tendency to experience higher levels of stress for a given level of debt mediates the increased likelihood of women reporting that debt has affected their health. However, there exists a possibility that some types of debt in some situations impact health of women more than men for reasons other than debt‐related stress.

Local Conditions and Debt in Collections

Using credit reporting firm records on 7 million individuals in the United States, we first demonstrate that debt in collections varies significantly across the country; specifically, the South and West regions have higher shares of individuals with debt in collections than other regions. Second, we identify local factors that are strongly related to debt in collections. Results from our regression models show that neighborhoods with higher rates of debt in collections are more likely to have (1) lower health insurance coverage; (2) lower home values and homeownership rates, (3) a higher share of delinquent and underwater mortgages, (4) lower household incomes, and (5) a higher share of African Americans and Latinos. While our analysis does not identify the causal mechanisms that determine financial distress, the analyses developed here can facilitate research on such mechanisms.

The “Fierce Urgency of Now”: Geriatrics Professionals Speaking up for Older Adult Care in the United States

The “Fierce Urgency of Now”: Geriatrics Professionals Speaking up for Older Adult Care in the United States

Rhetoric and Economics, Analysis and History

Rhetoric and Economics, Analysis and History

A Valuation Framework for Rent-to-Own Housing Contracts

The housing market crash in 2007 followed by a banking crisis and deep recession led to many underwater mortgages and a large shadow inventory of unsold properties. An innovative mechanism that may be playing a role in lowering inventories is the emergence of rent-to-own (RTO) housing contracts. RTO is potentially an attractive alternative to traditional financing for would-be buyers who cannot qualify for a mortgage due to an inadequate credit score, insufficient savings etc. These transactions, however, carry risks for both renters and owners. In this paper, we explore the contours of an RTO arrangement and suggest a binomial tree option valuation framework. In particular, we solve for the zero-profit purchase price at national and metro levels. We evaluate cases where the buyer can and cannot prematurely terminate the contract. We also consider scenarios in which both seller and buyer have deadweight costs that affect the contract outcome in a Nash bargaining framework. To the best of our knowledge, our model is the first analytical attempt to focus on the RTO housing contract.

A Search for the Genetic Contributors to Strategic Mortgage Default: The Catechol-O-Methyltransferase (COMT) Gene

This study is the first in real estate to identify a specific genetic marker with a significantly greater association for individuals who are more likely to strategically default on their underwater mortgage. The catechol-O-methyltransferase (COMT) gene produces an enzyme that regulates dopamine levels (among many other chemicals) in the prefrontal cortex of the brain. I find that borrowers who have one or two of the “A” alleles (or more formally, the “methionine” allele) are significantly more likely to strategically default than those who possess the “G” (or “valine”) allele. I find no significant association for the DRD4 7-repeater or the 5-HTTLPR markers. My hope is that future researchers will build upon this seminal study to better understand whether borrower strategic defaults are more a function of nature or nurture. Reconciling this difference has tremendous policy implications.

Using Bankruptcy to Reduce Foreclosures: Does Strip-Down of Mortgages Affect the Mortgage Market?

We assess the credit market impact of mortgage “strip-down” -- reducing the principal of underwater residential mortgages to the current market value of the property for homeowners who file for bankruptcy under Chapter 7 or Chapter 13. Strip-down of residential mortgages in bankruptcy was proposed in 2009 as a means of reducing foreclosures during the Great Recession but was blocked by lenders on the grounds that it would greatly increase the cost of mortgage loans. Our goal is to test this hypothesis and determine whether the change would in fact have a large adverse impact on mortgage availability. Our identification is provided by a series of U.S. Court of Appeals decisions in the late 1980s and early 1990s that introduced mortgage strip-down under both bankruptcy Chapters in parts of the U.S., followed by two Supreme Court rulings that abolished mortgage strip-down all over the country. We find that neither the circuit court decisions to allow strip-down nor the Supreme Court decisions to abolish it had any significant effect on either mortgage availability or mortgage interest rates. The lack of systematic response suggests that, at least during normal economic times when bankruptcy and foreclosure rates are low, introducing mortgage strip-down under bankruptcy would not adversely affect mortgage loan availability and could be a useful new policy tool to reduce foreclosures.

Using eminent domain to refinance underwater mortgages: A welfare analysis

This paper evaluates the welfare consequences of the proposed use of eminent domain to forcibly refinance “underwater” mortgages (mortgages for which the remaining loan balance exceeds the value of the house). Our results show that, in the absence of transaction costs, the policy unambiguously increases welfare, regardless of the amount of compensation paid to lenders. However, when takings generate transaction costs, we show that in a competitive mortgage market where borrowers fully finance the needed compensation through lump sum taxes, welfare is decreasing in transaction costs, but more generous compensation for lenders may either increase or decrease social welfare.

Mortgage default in an estimated model of the U.S. housing market

This paper models the housing sector, mortgages and endogenous default in a DSGE setting with nominal and real rigidities. We use data for the period 1981–2006 to estimate our model using Bayesian techniques. We analyze how an increase in risk in the mortgage market raises the default rate and spreads to the rest of the economy, creating a recession. In our model two shocks are well suited to replicate the subprime crisis and the Great Recession: the mortgage risk shock and the housing demand shock. Next we use our estimated model to evaluate a policy that reduces the principal of underwater mortgages. This policy is successful in stabilizing the mortgage market and makes all agents better off.

House arrest: the effects of underwater and low-equity mortgages on small business failure and mobility

This paper studies the effects of the recent housing crash on small business survival and household geographic mobility. Although a number of other works have studied these issues, our analysis differs from these because we do not focus only on underwater mortgages (less than 0% home equity), but also those slightly above water (0-10% equity). Homeowners with little or no equity face considerable constraints regarding moving, starting a business or keeping a current business open. They are more like underwater homeowners, but they differ enough to deserve a separate categorization in comparative studies, rather than being conflated with all other homeowners that have positive equity. We use the Federal Reserve’s Survey of Consumer Finances panel data for 2007 and 2009, which allows us to track the exact same households during this critical time in the housing crisis.

Amicus Curiae Brief to the Supreme Court of the United States Regarding Underwater Second-Lien Mortgages (Bank of America v. Caulkett & Bank of America v. Toledo-Cardona)

This United States Supreme Court amicus curiae brief was filed in the joint cases of Bank of America v. Caulkett and Bank of America v. Toledo-Cardona, which pose the question of whether a wholly underwater second-lien mortgage may be lien-stripped in a Chapter 7 bankruptcy. A previous Supreme Court decision, Dewsnup v. Timm (1992) held that Chapter 7 lien-stripping was not allowed on a partially-underwater first-lien mortgage, but expressly limited its holding to its facts. This scholar's brief in support of respondents (to allow lien-stripping) explains the key legal and economic differences between first-lien and second-lien mortgages that differentiate wholly underwater second-liens from the situation in Dewsnup v. Timm, and how petitioner's position would result in better treatment for liens in bankruptcy than in state law foreclosure proceedings. The brief also summarizes the empirical research on the impact of lien-stripping in bankruptcy on mortgage interest rates and explains why the mortgage market is unlikely to respond negatively to lien-stripping. Lastly, the brief addresses the current state of the second-lien mortgage lending market, and explains how high-loan-to-value second-lien lending has virtually disappeared.

Using Eminent Domain to Write-Down Underwater Mortgages: An Economic Analysis

A handful of economically distressed cities and counties are considering using their power of eminent domain to write down the principal of underwater mortgage loans. In this paper, we review the legal basis and economic impact of such government-forced loan restructuring. We develop a model of negative equity mortgage default both with and without government takings to determine if using eminent domain is socially desirable from a policy perspective. We find a trade-off between the immediate benefits of avoiding current mortgage defaults and longer term increased financing costs. The weighting of this trade-off is impacted by the determination of just compensation.

Underwater Mortgages

Underwater Mortgages

Robbing Peter and Blaming Paul

The Author’s purpose is to show the American community—and specifically the legal community—how and why Hockett’s proposal is not an ethically correct or appropriate solution for the underwater mortgage crisis. To achieve this end, the Author will give a detailed explanation of Professor Hockett’s proposal in Part II. Next, the Author will set forth Hockett’s explanation of what caused the underwater mortgage crisis in Part III. In Part IV the Author will provide his own belief on what the cause of the underwater mortgage crisis is. Then, after showing how Hockett does not assess the cause of the underwater mortgage crisis correctly, the Author will then show the reader how Hockett’s solution is not ethically appropriate in Part V. This Comment will evaluate the ethical resolve of Hockett’s solution using the legal philosophy of St. Thomas Aquinas. However, the Author is confident that if the reader is willing to inspect Hockett’s solution against the facts of what created the underwater mortgage crisis, the reader will then develop an intuitive sense for why Hockett’s solution is neither ethically correct nor appropriate.

A Neurological Explanation of Strategic Mortgage Default

This study examines strategic mortgage default on a neurological level. Specifically, we test two mainstream behavioral finance/economic theories: sunk cost fallacy and cognitive dissonance. Using fMRI technology, we identify a number of substrates within the brain that provide a neurobiological explanation for why some homeowners exercise their mortgage put option while others do not. We find that borrowers rationally do not suffer from the sunk cost fallacy as it relates to strategic default in that they significantly prioritize their negative equity position over the amount of their initial down payment. We do, however, find neurological support that cognitive dissonance is relevant in homeowners’ thought processes as they toil with the hesitancy brought on by the believe that strategic default is immoral against the strong financial incentive to walk away from a substantially underwater mortgage.

Paying Paul and Robbing No One: An Eminent Domain Solution for Underwater Mortgage Debt that Can Benefit Literally Everyone

In the view of many analysts, the best way to assist “underwater” homeowners — those who owe more on their mortgages than their houses are worth — is to reduce the principal on their home loans. Yet in the case of privately securitized mortgages, such write-downs are almost impossible to carry out, since loan modifications on the scale necessitated by the housing market crash would require collective action by a multitude of geographically dispersed security holders. The solution, this study suggests, is for state and municipal governments to use their eminent domain powers to buy up and restructure underwater mortgages, thereby sidestepping the need to coordinate action across large numbers of security holders.