Jingle Mail:

David below comments on the new trend toward voluntary foreclosures. In the business I understand that this is referred to as "jingle mail," where the borrower simply drops the keys into the mail to return to the lender. For those who are interested, I commented a bit on the two theories of foreclosure awhile back here.

Foreclosure can occur either because borrowers can't pay their mortgage (distress theory) or because they don't want to pay their mortgage (option theory). It turns out that the prevailing theory in economics is the option theory--foreclosures rise when property values fall because borrowers then have a valuable "put" option to permit foreclosure. Most empirical work historically supports the option theory as well, rather than the distress theory. Commenters to David's post note some of the factors that at the margin would be expected to increase the value of the option, including antideficiency laws (as in California) as well as the new Mortgage Foregiveness Debt Relief Act. Of course, even where a state provides a right to recourse lenders often will not pursue it if they think that the borrower is essentially judgment-proof.

As one would expect, default and foreclosure is also substantially higher where the borrower puts down no downpayment or a minimal downpayment.

Query for readers--has anyone seen any empirical studies of whether there is any effect of antideficiency statutes on foreclosure rates? Theory suggests that there must be some effect, but I have not found any empirical work on point. Most of the states with the highest foreclosure rates right now are those with antideficiency laws. Also, if anyone knows of a single comprehensive list of states with antideficiency laws, that is something I've been looking for as well. I've found one list, but it is not terribly user-friendly.

I'm putting the finishing touches on an article on the subprime meltdown that I'll be posting in a few days for anyone who is interested. The article provides a more detailed discussion of the theoretical and empirical work around these question of foreclosure.