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Liquidity problems and early payment default among subprime mortgages

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Author Info

  • Nathan B. Anderson
  • Jane K. Dokko

Abstract

The lack of property tax escrow accounts among subprime mortgages causes borrowers to make large lump-sum tax payments that reduce liquidity. Different property tax collection dates across states and counties create exogenous variation in the time between loan origination and the first property tax due date, affording the opportunity to estimate the causal effect of loan-level exposure to liquidity reductions on mortgage default. We find that a nine-month delay in owing property taxes reduces the probability of first-year default by about 4 percent, or about one-third of the effect of a reduction in equity from 10 percent to negative 20 percent.

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Bibliographic Info

Paper provided by Board of Governors of the Federal Reserve System (U.S.) in its series Finance and Economics Discussion Series with number 2011-09.

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Date of creation: 2011
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Handle: RePEc:fip:fedgfe:2011-09

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Related research

Keywords: Subprime mortgage ; Default (Finance) ; Property tax;

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References

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  1. Patrick Bajari & Chenghuan Sean Chu & Minjung Park, 2008. "An Empirical Model of Subprime Mortgage Default From 2000 to 2007," NBER Working Papers 14625, National Bureau of Economic Research, Inc.
  2. Andra C. Ghent & Marianna Kudlyak, 2010. "Recourse and residential mortgage default: theory and evidence from U.S. states," Working Paper 09-10, Federal Reserve Bank of Richmond.
  3. Sumit Agarwal & Chunlin Liu & Nicholas S. Souleles, 2007. "The Reaction of Consumer Spending and Debt to Tax Rebates-Evidence from Consumer Credit Data," Journal of Political Economy, University of Chicago Press, vol. 115(6), pages 986-1019, December.
  4. Yongheng Deng & John M. Quigley & Robert Van Order, . "Mortgage Terminations, Heterogeneity and the Exercise of Mortgage Options," Zell/Lurie Center Working Papers 322, Wharton School Samuel Zell and Robert Lurie Real Estate Center, University of Pennsylvania.
  5. David S. Johnson & Jonathan A. Parker & Nicholas S. Souleles, 2004. "Household Expenditure and the Income Tax Rebates of 2001," Working Papers 136, Princeton University, Woodrow Wilson School of Public and International Affairs, Discussion Papers in Economics..
  6. Foote, Christopher L. & Gerardi, Kristopher & Willen, Paul S., 2008. "Negative equity and foreclosure: Theory and evidence," Journal of Urban Economics, Elsevier, vol. 64(2), pages 234-245, September.
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Citations

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Cited by:
  1. Andreas Fuster & Paul S. Willen, 2012. "Payment size, negative equity, and mortgage default," Public Policy Discussion Paper 12-10, Federal Reserve Bank of Boston.
  2. Tal Gross & Matthew J. Notowidigdo & Jialan Wang, 2012. "Liquidity Constraints and Consumer Bankruptcy: Evidence from Tax Rebates," NBER Working Papers 17807, National Bureau of Economic Research, Inc.
  3. Raven Molloy & Hui Shan, 2011. "The post-foreclosure experience of U.S. households," Finance and Economics Discussion Series 2011-32, Board of Governors of the Federal Reserve System (U.S.).

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