Dynamic heterogeneous agent models of default on residential housing mortgages and farm real estate loans
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The first chapter of the dissertation examines two possible approaches to reducing residential mortgage default using a dynamic model of heterogeneous infinitely-lived agents acting optimally subject to uninsurable idiosyncratic earnings shocks and systemic house price shocks. We find higher down payments are very effective in minimizing residential mortgage foreclosures, even in periods of house price declines and recessions. In contrast, the length of the credit exclusionary period for people who experience bankruptcy or foreclosure has a much smaller impact on mortgage defaults. It suggests that a major aspect of credit scores and credit policy is non-productive and punitive, harming people in return for little societal gain. The second chapter of the dissertation assesses the impacts of agricultural commodity prices and the price of farmland on farmland loan default in the United States. This study solved a dynamic model of a family-owned farm that can purchase farmland with a farmland loan or sell its farmland and must simultaneously decide how much to consume in each period. We find that lower agricultural commodity prices and, a longer period of low prices will cause severer a higher level of farmland loan defaults. Meanwhile, the impact of farmland prices on default is more complex. In the short run, high farmland prices hold back beginning farmers but make the existing farmers wealthier, leading to a low default rate. In the long run, higher farmland prices increase the capital requirement of farming result in a thinner profit margin, and then the default rate will become higher. The dynamic simulation experiment tells a compelling story. After several periods of elevated farmland price, a plummeting price will follow an aggregate default peak. Given future expectations of lower commodity prices and lower farmland prices, agricultural banks should expect an increase in default rate. The study also suggests that a short period of cash transfer and a policy for market price stabilization will help alleviate the possibility of a future credit crisis.