dc.contributor.author | BALATTI, Mirco | |
dc.contributor.author | LOPEZ-QUILES CENTENO, Carolina | |
dc.date.accessioned | 2021-05-31T08:24:54Z | |
dc.date.available | 2021-05-31T08:24:54Z | |
dc.date.issued | 2021 | |
dc.identifier.uri | https://hdl.handle.net/1814/71496 | |
dc.description.abstract | In this paper we examine the effects of limited liability on mortgage dynamics. While
the literature has focused on default rates, renegotiation, or loan rates individually,
we study them together as equilibrium outcomes of the strategic interaction between
lenders and borrowers. We present a simple model of default and renegotiation
where the degree of limited liability plays a key role in agents’ strategies. We
then use Fannie Mae loan performance data to test the predictions of the model.
We focus on Metropolitan Statistical Areas that are crossed by a State border in
order to exploit the discontinuity in regulation around the borders of States. As
predicted by the model, we find that limited liability results in higher default rates
and renegotiation rates. Regarding loan pricing, while the model predicts higher
interest rates for limited liability loans, we find no such evidence in the Fannie Mae
data. We further investigate this by using loan application data, which contains
the interest rates on loans sold to private vs public investors. We find that private
investors do price in the difference in ex-ante predictable default risk for limited
liability loans. | en |
dc.format.mimetype | application/pdf | en |
dc.language.iso | en | en |
dc.publisher | European Central Bank | en |
dc.relation.ispartofseries | ECB Working Paper | en |
dc.relation.ispartofseries | 2021/2519 | en |
dc.relation.isreplacedby | https://hdl.handle.net/1814/71497 | |
dc.rights | info:eu-repo/semantics/openAccess | en |
dc.rights.uri | http://creativecommons.org/licenses/by/4.0/ | * |
dc.subject | Lender recourse | en |
dc.subject | Mortgage contracts | en |
dc.subject | Debt repudiation | en |
dc.subject | Renegotiation | en |
dc.subject | D10 | en |
dc.subject | E40 | en |
dc.subject | G21 | en |
dc.subject | R20 | en |
dc.title | Limited liability, strategic default and bargaining power | en |
dc.type | Working Paper | en |
dc.identifier.doi | 10.2866/502561 | |
dc.rights.license | Attribution 4.0 International | * |