Double Trigger: Does it Explain Differences in State Level Foreclosure Starts? Support for this project is from student differential tuition funds through the UWEC Summer Research Experiences for Undergraduates Program. Daniel Putman–Student Researcher and Laura Middlesworth –Faculty Collaborator

Income Shock vs. Housing Prices

Double Trigger Theory Declining House Value vs. Income Shock Bhutta, Dokko, and Shan (2010) found that the "median borrower does not walk away until equity has fallen to -62 percent of the house value.” A combination of falling house values and rising unemployment rates explain more than each variable could alone

Methodology & Baseline Regression MBAA National Delinquency Survey 4th Quarter 2009 until 1st Quarter 2011 Panel Least Squares Foreclosure Starts = ε + β 1 x 1 + β 2 x 2 + β 3 x 3 x 1 = Number of Quarters Since Peak x 2 = Three Month Unemployment Average (U-3) x 3 = “Double Trigger” Interaction term Demeaned

Double Trigger Term: β 3 x 3 = β 3 (x 1 -meanx 1 )×(x 2 -meanx 2 ) x 1 = Number of Quarters Since Peak x 2 = Three Month Unemployment Average

Empirical Results Subprime Foreclosure Starts x β 3 Month Unemployment Ave ** Number of Quarters Since Peak0.088*** Double Trigger Term0.016*** Affordability Index (Marginal, Non-Significant) Regional Dummy Variables White Period Standard Errors Significance: * (0.1), ** (0.05), *** (.01)

Results (Cont.) Prime Foreclosure Starts x β 3 Month Unemployment Ave *** Number of Quarters Since Peak 0.057*** Double Trigger Term 0.012*** Affordability Index (Non-Significant) Regional Dummy Variables White Period Fixed Effects

Unemployment and Underemployment U6 -“total unemployed [U3], plus all marginally attached workers, plus total employed part time for economic reasons, as a percent of the civilian labor force” U5 – “total unemployed, plus discouraged workers, plus all other marginally attached workers, as a percent of the civilian labor force” (BLS) U = U3 + U6 – U5

Results (Cont.) Subprime Foreclosure Starts x β Number of Quarters Since Peak 0.082*** Unemployment and Underemployment 0.057** Double Trigger Term0.012*** High Cost Variable (Non-Significant) Regional Dummy Variables White Period Fixed Effects

Results (Cont.) Prime Foreclosure Starts x β Number of Quarters Since Peak0.046*** Unemployment and Underemployment0.058*** Double Trigger Term0.009*** High Cost Variable (Non-Significant) Regional Dummy Variables White Period Fixed Effects

Additional Variables Division Dummy Variables Affordability Index Judicial Foreclosure Laws High Cost Index Recourse Laws Bankruptcy Exemptions

Policy Implications Hardest Hit Fund Implemented shortly after recession Largest fall in housing prices Largest unemployment problem Combination Possible loan modifications Address falling house prices Underwater house prices Meaningful as a reason for Policy Intervention

Further Research: MSA Level Study Localized Housing Markets Greater sensitivity to data Legal variables (state and local level) Panel VAR (Vector Auto Regression) Endogeny of prices, unemployment

Citations Neil Bhutta, Jane Dokko, and Hui Shan. The Depth of Negative Equity and Mortgage Default Decisions. Federal Reserve Board of Governors. May “Alternative Measures of Labor Underutilization for States." U.S. Bureau of Labor Statistics..