Friday’s Government Reports Round-Up

Wednesday’s Academic Roundup

Leverage and the Foreclosure Crisis

Dean Corbae and Erwan Quintin have posted Leverage and the Foreclosure Crisis to SSRN (behind a paywall; available here for free). They ask how “much of the recent rise in foreclosures can be explained by the large number of high-leverage mortgage contracts originated during the housing boom?” (1) Their model and counterfactual experiments suggest that “the increased availability of high-leverage loans prior to the crisis can explain between 40% and 65% of the initial rise in foreclosure rates.” (1)

In their introduction, they note that
The increased availability of loans with low downpayments made it possible for more households to obtain the financing necessary to purchase a house. At the same time however,because these contracts are characterized by little equity early in the life of the loan, they are prone to default when home prices fall. Not surprisingly then, mortgages issued during the recent housing boom with high leverage have defaulted at much higher frequency than other loans since home prices began their collapse in late 2006. (2, citations omitted)
Their finding are, as they note, not so surprising, although it is interesting to see them try to quantify the effect of low-downpayment mortgages.
More importantly, their paper will help inform the ongoing debate as to whether federal regulators should impose strict down-payment underwriting requirements upon lenders or whether they should allow lenders to develop more dynamic underwriting models for which downpayment requirements are just one factor.