Working Paper: NBER ID: w18850
Authors: Patrick Bajari; Chenghuan Sean Chu; Denis Nekipelov; Minjung Park
Abstract: The increase in defaults in the subprime mortgage market is widely held to be one of the causes behind the recent financial turmoil. Key issues of policy concern include quantifying the role of various factors, such as home price declines and loosened underwriting standards, in the recent increase in subprime defaults and predicting the effects of various policy instruments designed to mitigate default. To address these questions, we estimate a dynamic structural model of subprime borrowers' default behavior. We prove that borrowers' time preference is identified in our model and propose an easily implementable semiparametric plug-in estimator. Our results show that principal writedowns have a significant effect on borrowers' default behavior and welfare: a uniform 10% reduction in outstanding mortgage balance for the pool of borrowers in our sample would reduce the overall default probability by 22%, and borrowers' average willingness to pay for the principal writedown would be $16,643
Keywords: subprime mortgage; default; policy implications; dynamic model
JEL Codes: C14; C5; G21
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| economic shocks (F69) | borrowers' default behavior (G51) |
| policy interventions (D78) | borrowers' default behavior (G51) |
| borrowers' decisions (G51) | future borrower decisions (G51) |
| principal writedowns (G33) | borrowers' default behavior (G51) |
| principal writedowns (G33) | borrower welfare (G51) |
| time preferences (D15) | borrowers' default behavior (G51) |