Post date: Feb 4, 2012 6:42:23 AM
I have spent some time looking at housing data and I found the first direct evidence of the Double Trigger Hypothesis (a play on the mortgage default trigger hypothesis from Riddiough (1991)). For those unfamiliar with the term, the double trigger hypothesis is the idea that it takes not only negative equity to default but negative equity and job loss (or some other income loss). I use new household level data to test for this hypothesis and find that the hypothesis does indeed hold; negative equity alone is not the best predictor of default, instead the interaction term between unemployment and negative equity is. I originally put the results together in early 2011 thinking that it had been done before, but after an extensive search I realized that this is the first direct assessment of the hypothesis.
The working paper is hosted by UCLA Anderson who funded my project back in late 2010 (the results were found early 2011, first draft mid 2011)...
UPDATED VERSION: Updated Double Trigger Evidence (Job Loss, Unemployment, and Default) and Policy Implications
OLD VERSION: UCLA Anderson Ziman Center Working Paper 2012-02WP
I find that those with severe negative equity are 11% more likely to default than those with higher negative equity, regardless of their job loss status. However, those with moderate negative equity together with job loss are 37% more likely to have defaulted as of the survey date than those with just moderate negative equity. This is a great example of a trigger.
I also find that previous modifications are a great predictor of default, regardless of negative equity status.
Key Question: If modifications are the best predictor of default, why would anyone modify a loan? Why should tax payers subsidize modifications? Maybe its not the right type of modification...