EQUITY AND NONEQUITY DETERMINANTS OF FHA SINGLE-FAMILY MORTGAGE FORECLOSURES IN THE 1980S

We examine foreclosures on FHA single-family mortgages insured during the 1975-87 period. The importance of the market value of borrower equ ity and national house price dispersion support much earlier work emph asizing the key role of negative equity in triggering default. The low er is ''mean'' market-value equity, and the greater is dispersion, the greater is the fraction of borrowers likely to have negative equity. The unemployment rate and the book value of borrower equity are also s hown to be significant determinants of default. Unemployment is one of those events that can force borrowers to move. The moving decision in creases the likelihood of default because moving costs no longer deter default, and the costs of selling the house reduce the effective equi ty in the house. The book value of equity is relevant to this decision because it is what the sellers receive if they move without defaultin g. Not only are both of these variables significant determinants of de fault, but the smaller is book equity, the greater is employment impac t (with large book equity, unemployment should not matter because sell ing the house is preferred to default).