Extra Herkenhoff-Ohanian Evidence on Employment and Default

Post date: Oct 28, 2012 10:06:20 PM

In my recent paper on informal unemployment insurance, I present more evidence that people use default (as opposed to other formal avenues of supplementing income) often and it affects labor market outcomes. The graphs in that paper, which are shown below, are also going to appear in the original article, joint with Lee Ohanian and first presented at the Hoover institute in Dec. 2011, that looked at this type of behavior in the PSID.

The panels below are taken from the Survey of Consumer Finances (2009) and illustrate the use of default (not bankruptcy) by the unemployed (people were lined up in the cross-section by reported duration and reported delinquency, averages were taken in each bin). The panel (b) illustrates the employment per capita jumps near foreclosure abbreviated as FC (the sample is limited to mortgagors). The funny part is most seminar participants focus on the spike to the right of the graph, i.e. the spike into employment you observed moving from 60+ days late to foreclosure, but there is a lot of action moving the opposite direction for those who self-cure- from 60+ to current (and from the original paper "Foreclosure Delay and US Unemployment," I have documented that there are a lot of movements between late bins). Panel (c), the last panel on the right, does the same sort of exercise for all unsecured debt holders. There are similar spikes in and around bankruptcy, BUT because of the duration spent in bankruptcy, there are measurement issues- often times models are calibrated to match the bankruptcy rates but forget that it all began with default 1-2 years prior. This issue is not present with the mortgagors since the 60+ days late bin (time to foreclosure notice delivery) and the foreclosure (FC) bin (time in foreclosure) are similar in duration and were equally influenced by policies such as the Robo-signing moratoria.

Email me if you are interested in this type of research. I have 2 unposted papers on this topic that I would be glad to discuss.

Key Question: What happens in life after foreclosure? Are Ravn and Molloy (2011) right that there are no adverse affects, in terms of household size, resulting from foreclosure?