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What "triggers" mortgage default?

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  • Ronel Elul
  • Nicholas S. Souleles
  • Souphala Chomsisengphet
  • Dennis
  • Glennon
  • Robert Hunt

Abstract

This paper assesses the relative importance of two key drivers of mortgage default: negative equity and illiquidity. To do so, the authors combine loan-level mortgage data with detailed credit bureau information about the borrower's broader balance sheet. This gives them a direct way to measure illiquid borrowers: those with high credit card utilization rates. The authors find that both negative equity and illiquidity are significantly associated with mortgage default, with comparably sized marginal effects. Moreover, these two factors interact with each other: The effect of illiquidity on default generally increases with high combined loan-to-value ratios (CLTV), though it is significant even for low CLTV. County-level unemployment shocks are also associated with higher default risk (though less so than high utilization) and strongly interact with CLTV. In addition, having a second mortgage implies significantly higher default risk, particularly for borrowers who have a first-mortgage LTV approaching 100 percent.

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Bibliographic Info

Paper provided by Federal Reserve Bank of Philadelphia in its series Working Papers with number 10-13.

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Date of creation: 2010
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Handle: RePEc:fip:fedpwp:10-13

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Keywords: Mortgages ; Default (Finance);

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References

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  1. Sumit Agarwal & Chunlin Liu & Nicholas S. Souleles, 2007. "The Reaction of Consumer Spending and Debt to Tax Rebates -- Evidence from Consumer Credit Data," NBER Working Papers 13694, National Bureau of Economic Research, Inc.
  2. Kau James B. & Keenan Donald C. & Kim Taewon, 1994. "Default Probabilities for Mortgages," Journal of Urban Economics, Elsevier, vol. 35(3), pages 278-296, May.
  3. David B. Gross, 2002. "An Empirical Analysis of Personal Bankruptcy and Delinquency," Review of Financial Studies, Society for Financial Studies, Society for Financial Studies, vol. 15(1), pages 319-347, March.
  4. Neil Bhutta & Jane Dokko & Hui Shan, 2010. "The depth of negative equity and mortgage default decisions," Finance and Economics Discussion Series, Board of Governors of the Federal Reserve System (U.S.) 2010-35, Board of Governors of the Federal Reserve System (U.S.).
  5. 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.
  6. Ethan Cohen-Cole & Jonathan Morse, 2009. "Your house or your credit card, which would you choose?: personal delinquency tradeoffs and precautionary liquidity motives," Risk and Policy Analysis Unit Working Paper, Federal Reserve Bank of Boston QAU09-5, Federal Reserve Bank of Boston.
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Citations

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Cited by:
  1. Gregory Connor & Thomas Flavin, 2013. "Irish Mortgage Default Optionality," Economics, Finance and Accounting Department Working Paper Series, Department of Economics, Finance and Accounting, National University of Ireland - Maynooth n243-13.pdf, Department of Economics, Finance and Accounting, National University of Ireland - Maynooth.
  2. Sumit Agarwal & Itzhak Ben-David & Vincent Yao, 2013. "Collateral Valuation and Borrower Financial Constraints: Evidence from the Residential Real Estate Market," NBER Working Papers 19606, National Bureau of Economic Research, Inc.
  3. Guiso, Luigi & Sodini, Paolo, 2012. "Household Finance: An Emerging Field," CEPR Discussion Papers, C.E.P.R. Discussion Papers 8934, C.E.P.R. Discussion Papers.
  4. Michelle White & Wenli Li, 2011. "Residential Mortgage Default and Consumer Bankruptcy: Theory and Empirical Evidence," 2011 Meeting Papers, Society for Economic Dynamics 1038, Society for Economic Dynamics.
  5. Chan, Sewin & Gedal, Michael & Been, Vicki & Haughwout, Andrew, 2013. "The role of neighborhood characteristics in mortgage default risk: Evidence from New York City," Journal of Housing Economics, Elsevier, Elsevier, vol. 22(2), pages 100-118.
  6. Wenli Li & Michelle J. White & Ning Zhu, 2010. "Did Bankruptcy Reform Cause Mortgage Default to Rise?," NBER Working Papers 15968, National Bureau of Economic Research, Inc.
  7. International Monetary Fund, 2011. "Policy Instruments to Lean Against the Wind in Latin America," IMF Working Papers, International Monetary Fund 11/159, International Monetary Fund.
  8. James Kau & Donald Keenan & Constantine Lyubimov, 2014. "First Mortgages, Second Mortgages, and Their Default," The Journal of Real Estate Finance and Economics, Springer, Springer, vol. 48(4), pages 561-588, May.
  9. Ronel Elul, 2010. "What have we learned about mortgage default?," Business Review, Federal Reserve Bank of Philadelphia, Federal Reserve Bank of Philadelphia, issue Q4, pages 12-19.
  10. Eric Wong & Andrew Tsang & Steven Kong, 2014. "How Does Loan-To-Value Policy Strengthen Banks' Resilience to Property Price Shocks - Evidence from Hong Kong," Working Papers, Hong Kong Institute for Monetary Research 032014, Hong Kong Institute for Monetary Research.
  11. Gyourko, Joseph & Tracy, Joseph, 2014. "Reconciling theory and empirics on the role of unemployment in mortgage default," Journal of Urban Economics, Elsevier, vol. 80(C), pages 87-96.
  12. Christopher J. Mayer & Edward Morrison & Tomasz Piskorski & Arpit Gupta, 2011. "Mortgage Modification and Strategic Behavior: Evidence from a Legal Settlement with Countrywide," NBER Working Papers 17065, National Bureau of Economic Research, Inc.

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