Search

We study whether Google search behavior for "mortgage assistance" and "foreclosure help" aggregated in the mortgage default risk indicator (MDRI) of Chauvet et al. (2016) helps predict future house prices and foreclosures in local residential markets. Using a long-run equilibrium model, we disaggregate house prices into their fundamental and bubble components, and we find that MDRI dampens both components of house prices. This negative relationship is robust to various model specifications and time horizons. A higher intensity of search online, however, is associated with lower future foreclosure rates. We also find that foreclosure rates increase after a decline in the fundamental component of home values, but are not sensitive to their transitory (bubble) component. Foreclosure rates are higher in metropolitan areas located in non-recourse states. We interpret these findings as evidence for strategic household behavior. Our paper sheds new light on the predictive power of household sentiment derived from Google searches on prices and foreclosure rates in local housing markets. [ABSTRACT FROM AUTHOR]

This study explores the hedging coefficients of the financial options to default and to prepay embedded into mortgage contracts based on the change in spot rate, underlying house price and its volatility. In the computations, the finite-dimensional Malliavin calculus is applied since the distribution of both options is unknown and their payoffs are non-differentiable. Naturally, the hedging coefficients are obtained as a product of option's payoff and an independent weight, which permits the user to derive estimations for the hedging coefficients by running a crude Monte Carlo (MC) algorithm. The simulations reveal that the financial options to default and to prepay are both more sensitive to a change in spot rate than a change in underlying house price and its volatility. There are two potential usages of the hedging coefficients: first, they allow the user to determine the effects of spot rate and underlying house price change and its volatility on the default and prepayment options, and second, borrowers and lenders can replicate and hedge their main portfolio by using the balance between these coefficients and the default and prepayment options. [ABSTRACT FROM AUTHOR]