Double Trigger: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 PricesIncome Shock vs. Housing Prices

Double Trigger TheoryDouble 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 RegressionMethodology & Baseline Regression

• MBAA National Delinquency Survey

• 4th Quarter 2009 until 1st Quarter 2011

• Panel Least Squares

Foreclosure Starts = ε +  β1x1 + β2x2 + β3x3

• x1 = Number of Quarters Since Peak• x2 = Three Month Unemployment Average (U-3)• x3 = “Double Trigger” Interaction term

• Demeaned 

Double Trigger Term:Double Trigger Term:

β3x3 = β3(x1-meanx1)×(x2-meanx2)

• x1 = Number of Quarters Since Peak• x2 = Three Month Unemployment Average

Empirical ResultsEmpirical Results

Subprime Foreclosure Startsx β

3 Month Unemployment Ave. 0.058**

Number of Quarters Since Peak 0.088***

Double Trigger Term 0.016***

Affordability Index (Marginal, Non-Significant)Regional Dummy Variables

White Period Standard Errors

Significance: * (0.1), ** (0.05), *** (.01)

Results (Cont.)Results (Cont.)Prime Foreclosure Starts

x β

3 Month Unemployment Ave. 0.069***

Number of Quarters Since Peak 0.057***

Double Trigger Term 0.012***

Affordability Index (Non-Significant)Regional Dummy VariablesWhite Period Fixed Effects

Unemployment and UnderemploymentUnemployment 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.)Results (Cont.)Subprime Foreclosure Starts

x β

Number of Quarters Since Peak 0.082***

Unemployment and Underemployment 0.057**

Double Trigger Term 0.012***

High Cost Variable (Non-Significant)Regional Dummy VariablesWhite Period Fixed Effects

Results (Cont.)Results (Cont.)Prime Foreclosure Starts

x β

Number of Quarters Since Peak 0.046***

Unemployment and Underemployment 0.058***

Double Trigger Term 0.009***

High Cost Variable (Non-Significant)Regional Dummy VariablesWhite Period Fixed Effects

Additional VariablesAdditional Variables

• Division Dummy Variables

• Affordability Index

• Judicial Foreclosure Laws

• High Cost Index 

• Recourse Laws

• Bankruptcy Exemptions

Policy ImplicationsPolicy 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 StudyFurther 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

CitationsCitations• Neil Bhutta, Jane Dokko, and Hui Shan. The Depth of

Negative Equity and Mortgage Default Decisions. Federal Reserve Board of Governors. May 2010.

• “Alternative Measures of Labor Underutilization for States." U.S. Bureau of Labor Statistics. <http://www.bls.gov/lau/stalt.htm>.