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According to the SCE housing survey, a decline in home value accounts for 17.1% of all foreclosure decisions while 36% are due to job loss. However, this evidence conflicts with the collateral literature constraint (e.g. Kiyotaki and Moore (1997), Iacoviello (2005)) where only the housing price and the interest rate are drivers of borrowing dynamics.
Then, this paper proposes to link the collateral constraint with the inflows and outflows of employment. As a result of our new microfounded borrowing constraint, we obtain three main results. First, the Loan-To-Value ratio becomes endogenous and dependent on the finding probability for a job seeker. Second, by estimating our model on US data with different collateral constraints, we find that our approach is more able to catch the dynamics between mortgage debts and employment fluctuations and outperforms the other considered models. Third, we find important implications for policy-makers where a deregulation labor market conduces to an increase of the housing price and debt while a macroprudential tightening helps to reduce these negative externalities.
