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Liquidity Problems and Early Payment Default among Subprime Mortgages

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  • Nathan B. Anderson

    (Ropes & Gray LLP)

  • Jane K. Dokko

Abstract

We compare the twelve-month default probability among subprime borrowers differing only in the number of months before their first lump-sum property tax payment, after which time they may be exposed to reduced liquidity. We show that borrowers with an earlier property tax bill—within three months of origination—have 2% to 6% higher first-year default rates than borrowers facing their first property tax bill ten to twelve months after origination. Lump-sum property tax payments appear to produce a persistent state of low liquidity, the length of which raises the likelihood of default. These results are about one-third the effect size of a transition from 10% positive to 20% negative equity found in the literature. This paper provides causal evidence that liquidity constraints are important predictors of mortgage default.

Suggested Citation

  • Nathan B. Anderson & Jane K. Dokko, 2016. "Liquidity Problems and Early Payment Default among Subprime Mortgages," The Review of Economics and Statistics, MIT Press, vol. 98(5), pages 897-912, December.
  • Handle: RePEc:tpr:restat:v:98:y:2016:i:5:p:897-912
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    References listed on IDEAS

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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. Marika Cabral & Caroline Hoxby, 2012. "The Hated Property Tax: Salience, Tax Rates, and Tax Revolts," NBER Working Papers 18514, National Bureau of Economic Research, Inc.
    3. 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.
    4. Nicholas S. Souleles & Jonathan A. Parker & David S. Johnson, 2006. "Household Expenditure and the Income Tax Rebates of 2001," American Economic Review, American Economic Association, vol. 96(5), pages 1589-1610, December.
    5. 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.
    6. Yongheng Deng & John M. Quigley & Robert Van Order, 2000. "Mortgage Terminations, Heterogeneity and the Exercise of Mortgage Options," Econometrica, Econometric Society, vol. 68(2), pages 275-308, March.
    7. 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.
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    Cited by:

    1. Raven Molloy & Hui Shan, 2013. "The Postforeclosure Experience of U.S. Households," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 41(2), pages 225-254, June.
    2. Moulton, Stephanie & Haurin, Donald R. & Shi, Wei, 2015. "An analysis of default risk in the Home Equity Conversion Mortgage (HECM) program," Journal of Urban Economics, Elsevier, vol. 90(C), pages 17-34.
    3. repec:eco:journ1:2017-05-32 is not listed on IDEAS
    4. Andreas Fuster & Paul S. Willen, 2017. "Payment Size, Negative Equity, and Mortgage Default," American Economic Journal: Economic Policy, American Economic Association, vol. 9(4), pages 167-191, November.
    5. Tal Gross & Matthew J. Notowidigdo & Jialan Wang, 2014. "Liquidity Constraints and Consumer Bankruptcy: Evidence from Tax Rebates," The Review of Economics and Statistics, MIT Press, vol. 96(3), pages 431-443, July.

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