An_Deng_Gabriel_Default_Option_Exercise_over_the_Financial_Crisis__and_Beyond__8-18-2017
➤ Gửi thông báo lỗi ⚠️ Báo cáo tài liệu vi phạmNội dung chi tiết: An_Deng_Gabriel_Default_Option_Exercise_over_the_Financial_Crisis__and_Beyond__8-18-2017
An_Deng_Gabriel_Default_Option_Exercise_over_the_Financial_Crisis__and_Beyond__8-18-2017
Default Option Exercise over the Financial Crisis and Beyond 'Xudong An* Federal Reserve Bank of PhiladelphiaYongheng Deng*National University of Sing An_Deng_Gabriel_Default_Option_Exercise_over_the_Financial_Crisis__and_Beyond__8-18-2017gaporeStuart A. Gabriel5UCLAAbstractWe document increased ruthlessness of mortgage default option exercise over the financial crisis and find the marked upturn in default option exercise was even more important to crisis period defaults than was the collapse in home equity. Analysis farther indicate An_Deng_Gabriel_Default_Option_Exercise_over_the_Financial_Crisis__and_Beyond__8-18-2017s that much of the variation in default ruthlessness can be explained by the local business cycle, house price expectations, and consumer distress. AlAn_Deng_Gabriel_Default_Option_Exercise_over_the_Financial_Crisis__and_Beyond__8-18-2017
so, results suggest elevated default option exercise in the wake of enactment of crisis-period loan modification programs.JEL Classification: G21; G12Default Option Exercise over the Financial Crisis and Beyond 'Xudong An* Federal Reserve Bank of PhiladelphiaYongheng Deng*National University of Sing An_Deng_Gabriel_Default_Option_Exercise_over_the_Financial_Crisis__and_Beyond__8-18-2017a. Gene Amromim. Linda Allen. Brent Ambrose. Bob Avery. Gadi Barlevy. Neal Bhutta. Shaun Bond. Alex Borisov. Raphael Bostic. John Campbell. Paul Calem. Alex Chinco. John Cotter. Larry Cordell. Tom Davidoff. Moussa Diop. Darrell Duffle. Ronel Elul. Jianqing Fan. Andra Ghent. Matt Kahn. Bill Lang. Dav An_Deng_Gabriel_Default_Option_Exercise_over_the_Financial_Crisis__and_Beyond__8-18-2017id Ling. Crocker Liu. Jaime Luque. Steve Malpezzi. Andy Naranjo. Raven Molloy. Kelley Pace. Erwan Quintin, Tim Riddiough, Dan Ringo, Amit Seni. ShaneAn_Deng_Gabriel_Default_Option_Exercise_over_the_Financial_Crisis__and_Beyond__8-18-2017
Sherhind. Steve Ross. Eduardo Schwartz. Joe Tracy. Alexi Tschisty. Kerry Vandell. Paul Willen. Wei Xiong. Vincent Yao. Abdullah Yavas and conference aDefault Option Exercise over the Financial Crisis and Beyond 'Xudong An* Federal Reserve Bank of PhiladelphiaYongheng Deng*National University of Sing An_Deng_Gabriel_Default_Option_Exercise_over_the_Financial_Crisis__and_Beyond__8-18-2017Federal Reserve Board. Georgia State University, the Homer Hoyt Institute. National University of Singapore. Tel Aviv University. Urban Economics Association, uc Irvine. UIUC. University of Cincinnati. University of Connecticut and University of Wisconsin for helpful comments. The authors acknowledg An_Deng_Gabriel_Default_Option_Exercise_over_the_Financial_Crisis__and_Beyond__8-18-2017e financial support from the UCLA Ziman Center for Real Estate and the NUS Institute of Real Estate Studies. The authors also gratefully acknowledge tAn_Deng_Gabriel_Default_Option_Exercise_over_the_Financial_Crisis__and_Beyond__8-18-2017
he excellent research assistance provided by Chenxi Luo and Xiangyu Guo. The views expressed here are not necessarily those of the Federal Reserve BanDefault Option Exercise over the Financial Crisis and Beyond 'Xudong An* Federal Reserve Bank of PhiladelphiaYongheng Deng*National University of Sing An_Deng_Gabriel_Default_Option_Exercise_over_the_Financial_Crisis__and_Beyond__8-18-2017on. Regulation, and Credit. Federal Reserve Bank of Philadelphia. Email: Xudong.An@phil.frb.org• Department of Real Estate and NUS Business School. National University of Singapore. Email: ydeng@nus.edu.sg5Corresponding author. UCLA Anderson School of Management. Email: sgabriel@anderson.ucla.edu.1. An_Deng_Gabriel_Default_Option_Exercise_over_the_Financial_Crisis__and_Beyond__8-18-2017 IntroductionDefault on residential mortgages skyrocketed during the late-2000s. giving rise to widespread financial institution failure and global fiAn_Deng_Gabriel_Default_Option_Exercise_over_the_Financial_Crisis__and_Beyond__8-18-2017
nancial crisis. Among factors salient to mortgage failure, analysts have pointed to the importance of property value declines induced rising negative Default Option Exercise over the Financial Crisis and Beyond 'Xudong An* Federal Reserve Bank of PhiladelphiaYongheng Deng*National University of Sing An_Deng_Gabriel_Default_Option_Exercise_over_the_Financial_Crisis__and_Beyond__8-18-2017aper, we provide new evidence of increased ruthlessness of default option exercise as another (but yet to be fully explored) fundamental driver of crisis period defaults. In fact, we find shifts in default option exercise behavior were even more important to the run-up in defaults than w declines in An_Deng_Gabriel_Default_Option_Exercise_over_the_Financial_Crisis__and_Beyond__8-18-2017 home equity.In research dating from the 1980s. mortgage default is modeled as borrower exercise of the put option (see literature reviews by QuerciaAn_Deng_Gabriel_Default_Option_Exercise_over_the_Financial_Crisis__and_Beyond__8-18-2017
and Stegman. 1992 and Kau and Keenan. 1995). Indeed, empirical findings have shown that negative equity, a proxy for the intrinsic value of the put opDefault Option Exercise over the Financial Crisis and Beyond 'Xudong An* Federal Reserve Bank of PhiladelphiaYongheng Deng*National University of Sing An_Deng_Gabriel_Default_Option_Exercise_over_the_Financial_Crisis__and_Beyond__8-18-2017ecent research, however, indicates that home equity must turn deeply negative before most borrowers exercise the default option (see. for example. Bhutta. Dokko and Shan. 2016). Those findings offer empirical support for a "non-ruthless option-exercise” theory of mortgage default (see. for example. An_Deng_Gabriel_Default_Option_Exercise_over_the_Financial_Crisis__and_Beyond__8-18-2017Vandell. 1995; Ambrose, Buttimer and Capone. 1997). We extend this literature to show systematic variability in ruthlessness of default option exercisAn_Deng_Gabriel_Default_Option_Exercise_over_the_Financial_Crisis__and_Beyond__8-18-2017
e among a cross-section of MSAs and over the economic cycle.1 2To empirically identify the dynamics of default option exercise, we apply microdata to Default Option Exercise over the Financial Crisis and Beyond 'Xudong An* Federal Reserve Bank of PhiladelphiaYongheng Deng*National University of Sing An_Deng_Gabriel_Default_Option_Exercise_over_the_Financial_Crisis__and_Beyond__8-18-2017temporaneous value of negative equity of the underlining property and numerous other factors. The estimated coefficient on negative equity1 The long list of references include but are not limited to Mayer. Pence and Sherhind. 2009, Demyanyk and Van Hemert. 2011; Mian and Sufi, 2009; Keys, et al. 201 An_Deng_Gabriel_Default_Option_Exercise_over_the_Financial_Crisis__and_Beyond__8-18-20170; Agarwal et al, 2011, 2012. 2014, 2016; Piskorski. Sent, and Witkin, 2015; Rajan, Seni, and Vig, 2015; Cheng. Rama and Xiong. 2014; Gerardi, et al.An_Deng_Gabriel_Default_Option_Exercise_over_the_Financial_Crisis__and_Beyond__8-18-2017
2008; Mian and Sufi. 2011; Mian. Sufi, and Trebbi. 2010. 2015: An. Deng and Gabriel. 2011; Taylor and Sherlund. 2015. Haughwout, et al. 2011, 2014; LiDefault Option Exercise over the Financial Crisis and Beyond 'Xudong An* Federal Reserve Bank of PhiladelphiaYongheng Deng*National University of Sing An_Deng_Gabriel_Default_Option_Exercise_over_the_Financial_Crisis__and_Beyond__8-18-2017015; Cotter. Gabriel, and Roll. 2015; Ambrose. Conklin and Yoshida. 2015; Bayer. Ferreira and Ross. 2016. Keys, et al. 2016. etc.■ In related literature on corporate default. Duffle et al (2009) find evidence of dynamic variation in the role of common latent factors in predicting firm level default. An_Deng_Gabriel_Default_Option_Exercise_over_the_Financial_Crisis__and_Beyond__8-18-2017(below labelled the negative equity beta) is a measure of borrower ruthlessness (or propensity) to default in the presence of negative equity. ContrarAn_Deng_Gabriel_Default_Option_Exercise_over_the_Financial_Crisis__and_Beyond__8-18-2017
y to the existing mortgage default literature, we allow the negative equity beta to vary over lime and place.Recent research has further underscored tDefault Option Exercise over the Financial Crisis and Beyond 'Xudong An* Federal Reserve Bank of PhiladelphiaYongheng Deng*National University of Sing An_Deng_Gabriel_Default_Option_Exercise_over_the_Financial_Crisis__and_Beyond__8-18-2017nd Gerardi, el al. 2015 for the double trigger argument).3 Hence, our default model includes highly disaggregated zip code-level income controls. Also, our model includes a large number of other covariates including controls for incentive to refinance (to address for the competing risks in option ex An_Deng_Gabriel_Default_Option_Exercise_over_the_Financial_Crisis__and_Beyond__8-18-2017ercise) as well as numerous borrower, loan, and locational characteristics.We estimate our models using expansive micro data on loan performance durinAn_Deng_Gabriel_Default_Option_Exercise_over_the_Financial_Crisis__and_Beyond__8-18-2017
g the 2006-2013 period.4 Our primary datasets include monthly mortgage performance history’ for both private-label securitizations (PLS) and Freddie MDefault Option Exercise over the Financial Crisis and Beyond 'Xudong An* Federal Reserve Bank of PhiladelphiaYongheng Deng*National University of Sing An_Deng_Gabriel_Default_Option_Exercise_over_the_Financial_Crisis__and_Beyond__8-18-2017 0.07 in 2007 to about 0.7 in 2012 (Figure 1), leading to substantially higher default probabilities for a given level of negative equity (Figure 2). Model simulation indicates that defaults would have been only one-third of their actual crisis period level, in the wake of the recorded house price i An_Deng_Gabriel_Default_Option_Exercise_over_the_Financial_Crisis__and_Beyond__8-18-2017mplosion, had borrower propensity to default not turned up (Figure 3). These findings suggest that the rise in the negative equity beta during the criAn_Deng_Gabriel_Default_Option_Exercise_over_the_Financial_Crisis__and_Beyond__8-18-2017
sis period was highly salient to the elevated default rate.We also find substantial heterogeneity in the negative equity beta among sampled MSAs. FiguDefault Option Exercise over the Financial Crisis and Beyond 'Xudong An* Federal Reserve Bank of PhiladelphiaYongheng Deng*National University of Sing An_Deng_Gabriel_Default_Option_Exercise_over_the_Financial_Crisis__and_Beyond__8-18-2017equity beta time-series differ both in slope and in turning point.We then explore possible explanations of heterogeneity in borrower propensity to default. Tn so doing, we lay out a simple theoretical framework that illuminates the role of negative equity and other key variables in the borrower’s de An_Deng_Gabriel_Default_Option_Exercise_over_the_Financial_Crisis__and_Beyond__8-18-2017cision to default. Our model builds on existing literature and assumes that borrowers have rational expectations and engage in default to maximize' AcAn_Deng_Gabriel_Default_Option_Exercise_over_the_Financial_Crisis__and_Beyond__8-18-2017
cording to the double-nigger argument, negative equity is a necessary but not sufficient condition tor mortgage default. That argument timber stressesDefault Option Exercise over the Financial Crisis and Beyond 'Xudong An* Federal Reserve Bank of PhiladelphiaYongheng Deng*National University of Sing An_Deng_Gabriel_Default_Option_Exercise_over_the_Financial_Crisis__and_Beyond__8-18-2017attern of default exercise during the GFC period. We have also estimated our default models with extended sampling period by including data prior to the crisis period. Our findings remain robust.1wealth (see. for example. Kau et al. 1992; Riddiough and Wyatt. 1994b; Ambrose. Buttimer and Capone. 199 An_Deng_Gabriel_Default_Option_Exercise_over_the_Financial_Crisis__and_Beyond__8-18-20177; Campbell and Cocco. 2015; and Corbae and Quintin. 2015). The model suggests that borrower propensity to default can vary' over time due to factorsAn_Deng_Gabriel_Default_Option_Exercise_over_the_Financial_Crisis__and_Beyond__8-18-2017
such as changing borrower expectations on the path of the local economy, borrowers* subjective assessment of the conditional probability of foreclosurGọi ngay
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