Determinants of Mortgage Default Rates: Pre-Crisis and Crisis Period Dynamics and Stability

In this study, we investigate the dynamic relation among mortgage default rates, housing prices, unemployment rate, the loan-to-value ratio, the debt-to-income ratio, and monetary (interest rate) policy in the United States before and during the mortgage crisis associated with the recent global financial crisis. We find that the housing market, macroeconomic, and borrower characteristic variables are cointegrated before the financial crisis, but this relation disappears during the crisis, indicating that the housing market may become segmented during severe crises. We conclude that traditional monetary policy actions, such as adjusting interest rates, may not be effective in alleviating mortgage defaults during a mortgage crisis. In the short term, monetary policy actions can help to reduce unemployment caused by a weak housing market, but the direct impact on the housing market itself is likely insignificant.