Kristopher Gerardi, Adam Hale Shapiro, and Paul S. Willen
Working Paper 2009-25
September 2009

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We estimate a model of foreclosure using a data set that includes every residential mortgage, purchase-and-sale, and foreclosure transaction in Massachusetts from 1989 to 2008. We address the identification issues related to the estimation of the effects of house prices on residential foreclosures. We then use the model to study the dramatic increase in foreclosures that occurred in Massachusetts between 2005 and 2008 and conclude that the foreclosure crisis was primarily driven by the severe decline in housing prices that began in the latter part of 2005, not by a relaxation of underwriting standards on which much of the prevailing literature has focused. We argue that relaxed underwriting standards did severely aggravate the crisis by creating a class of homeowners who were particularly vulnerable to the decline in prices. But, as we show in our counterfactual analysis, that emergence alone, in the absence of a price collapse, would not have resulted in the substantial foreclosure boom that was experienced.

JEL classification: D11, D12, G21

Key words: foreclosure, mortgage, house prices

Parts of this paper appeared earlier in Boston Fed Working Paper 07-15, titled “Subprime Outcomes: Risky Mortgages, Homeownership and Foreclosure.” The authors thank Chris Foote, who figured out how to identify subprime purchase mortgages in the Warren Group data using the HUD subprime lender list, which greatly simplified this project. They also thank Paul Calem, John Campbell, Jeff Fuhrer, Simon Gilchrist, Lorenz Goette, Robert King, Andy Haughwout, Zach Kimball, David Laibson, Andreas Lehnert, Atif Mian, Paolo Pellegrini, Karen Pence, Anthony Pennington-Cross, Erwan Quintin, Julio Rotemberg, Amir Sufi, and Geoff Tootell; audiences at Boston University, the University of California-Berkeley, Harvard University, MIT, Fordham University, Moody's KMV, Freddie Mac, George Washington University; the Federal Reserve Banks of Atlanta, Boston, New York, Philadelphia, Kansas City, Richmond, and San Francisco; the Board of Governors of the Federal Reserve System; the Chicago Fed Bank Structure Conference; the Homer Hoyt Institute; the Rodney White Conference at the Wharton School; and participants in the Stanford Institute for Theoretical Economics, the Society for Economic Dynamics, the National Bureau of Economic Research Summer Institute, and the American Real Estate and Urban Economics Association midyear meetings for helpful comments and suggestions. They are grateful to the hospitality of Studienzentrum Gerzensee, where this paper was completed. They also thank Tim Warren and Alan Pasnik of the Warren Group and Dick Howe Jr., the registrar of deeds of North Middlesex County, Mass., for providing them with data, advice, and insight, and they thank Anthony Pennington-Cross for providing computer programs. Finally, they thank Elizabeth Murry for helpful comments and edits. The views expressed here are the author's and not necessarily those of the Federal Reserve Bank of Atlanta or the Federal Reserve System. Any remaining errors are the author's responsibility.

Please address questions regarding content to Kristopher Gerardi, Research Department, Federal Reserve Bank of Atlanta, 1000 Peachtree Street, N.E., Atlanta, GA 30309-4470,; Adam Hale Shapiro, U.S. Department of Commerce, Office of the Chief Economist, Bureau of Economic Analysis, 1441 L Street, N.W., Washington, DC 20230, 202-606-9562,; or Paul S. Willen, National Bureau of Economic Research and Research Department, Federal Reserve Bank of Boston, P.O. Box 55882, Boston, MA 02205, 617-973-3149,

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