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FRBSF ECONOMIC LETTER

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Abstract

When the housing boom of the past decade turned into a bust, falling house prices played a primary role in driving up delinquency and foreclosure rates. As housing values fell, distressed borrowers lost equity, which hindered their ability to escape delinquency by prepaying their mortgages by refinancing or selling their homes. Falling house prices may have especially impinged on subprime and adjustable-rate borrowers. These homeowners may have counted on being able eventually to refinance into loans with terms more affordable than those of their original mortgages. Since their peak in mid-2006, house prices have experienced a fall without precedent in the post-World War II era, declining 32 % nationwide and more than 45 % in markets such as Las Vegas, Phoenix, and parts of Florida. Those declines have played a key role in the crisis of the mortgage market, which has been marked by surging delinquencies and foreclosures. An early study of the crisis by Doms, Furlong, and Krainer (2007) found a strong positive relationship between the rate of house-price depreciation in urban areas and the subsequent rate of subprime mortgage delinquency. What are the mechanisms connecting falling house prices and rising delinquencies? One important link may be that, when home equity declines, distressed borrowers have few options except to stop payin

Year: 2012
OAI identifier: oai:CiteSeerX.psu:10.1.1.352.6306
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