Labor Market Dysfunction During the Great Recession

This paper documents the abnormally slow recovery in the labor market during the Great Recession, and analyzes how mortgage modification policies contributed to delayed recovery. By making modifications means-tested by reducing mortgage payments based on a borrower's current income, these programs change the incentive for households to relocate from a relatively poor labor market to a better labor market. We find that modifications raise the unemployment rate by about 0.5 percentage points, and reduce output by about 1 percent, reflecting both lower employment and lower productivity, which is the result of individuals losing skills as unemployment duration is longer.

Unemployment, negative equity, and strategic default

Using new household-level data, we quantitatively assess the roles that job loss, negative equity, and wealth (including unsecured debt, liquid assets, and illiquid assets) play in default decisions. In sharp contrast to prior studies that proxy for individual unemployment status using regional unemployment rates, we find that individual unemployment is the strongest predictor of default. We find that individual unemployment increases the probability of default by 5 - 13 percentage points, ceteris paribus, compared with the sample average default rate of 3.9 percent. We also find that only 13.9 percent of defaulters have both negative equity and enough liquid or illiquid assets to make one month's mortgage payment. This finding suggests that "ruthless" or "strategic" default during the 2007 - 09 recession was relatively rare and that policies designed to promote employment, such as payroll tax cuts, are most likely to stem defaults in the long run rather than policies that temporarily modify mortgages

Can't pay or won't pay? Unemployment, negative equity, and strategic default

Prior research has found that job loss, as proxied for by regional unemployment rates, is a weak predictor of mortgage default. In contrast, using micro data from the PSID, this paper finds that job loss and adverse financial shocks are important determinants of mortgage default. Households with an unemployed head are approximately three times as likely to default as households with an employed head. Similarly, households that experience divorce, report large outstanding medical expenses, or have had any other severe income loss are much more likely to default. While household-level employment and financial shocks are important drivers of mortgage default, our analysis shows that the vast majority of financially distressed households do not default. More than 80 percent of unemployed households with less than one month of mortgage payment in savings are current on their payments. We argue that this has important implications for theoretical models of mortgage default as well as for loss mitigation policies. Finally, this paper provides some of the first direct evidence on the extent of strategic default. Wealth data suggest a limited scope for strategic default, with only one-third of underwater defaulters having enough liquid assets to cover one month´s mortgage payment