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Why do Borrowers Default on Mortgages?

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  • Peter Ganong
  • Pascal Noel

Abstract

There are three prevailing theories of mortgage default: strategic default (driven by negative equity), cash flow default (driven by negative life events), and double-trigger default (where both negative triggers are necessary). It has been difficult to compare these theories in part because negative life events are measured with error. We address this measurement error using a comparison group of borrowers with no strategic-default motive. Our central finding is that only 6% of underwater defaults are caused exclusively by negative equity, an order of magnitude lower than previously thought. We then analyze the remaining defaults. We find that 70% are driven solely by negative life events (i.e., cash flow defaults), while 24% are driven by the interaction between negative life events and negative equity (i.e., double-trigger defaults). Together, the results provide a full decomposition of the theories underlying borrower default and suggest that negative life events play a central role.

Suggested Citation

  • Peter Ganong & Pascal Noel, 2023. "Why do Borrowers Default on Mortgages?," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 138(2), pages 1001-1065.
    • Handle: RePEc:oup:qjecon:v:138:y:2023:i:2:p:1001-1065.
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    File URL: http://hdl.handle.net/10.1093/qje/qjac040
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    Cited by:

    1. Jan K. Brueckner & James N. Conklin & N. Edward Coulson & Moussa Diop, 2023. "Default Costs and Repayment of Underwater Mortgages," CESifo Working Paper Series 10755, CESifo.

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