Downpayment, mobility and default: A welfare analysis
In this paper, I study the impact of the relaxation of downpayment requirements on home-ownership and default risk in the context of a static spatial life cycle model. Given its quantitative success in matching the U.S. home-ownership curve, my model represents a reasonable benchmark for assessing the efficiency of mortgage default prevention policies. I find that both income and geographical mobility are the main trigger factors for default decisions. In fact, households with a higher mobility (i.e. young households) rate are more likely to default. According to the welfare analysis, I suggest that policymakers include a minimum downpayment requirement of 9.5% in the new definition of the Qualified Residential Mortgage (QRM). This number should, however, be viewed with some caution, since I focus on a steady-state economy, in which house prices are constant. In fact, house prices represent an important factor influencing the default rate. Potentially, the optimal minimum downpayment requirement should be set at a higher value than 9.5%. - 2017 Elsevier Inc.
- Finance & Economics [94 items ]