Mortgage Default during the US Mortgage Crisis

Which theory can quantitatively explain the rise in mortgage defaults during the U.S. mortgage crisis? This paper finds that the double-trigger hypothesis, which attributes mortgage default to the joint occurrence of negative equity and a life event such as unemployment, is consistent with the evidence. By contrast, a traditional frictionless default model strongly overpredicts the increase in default rates. This paper provides microfoundations for double-trigger behavior in a model where unemployment causes liquidity problems for the borrower. This framework implies that mortgage crises may be mitigated at a lower cost by bailing out borrowers instead of lenders