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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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    Cited by:

    1. Liu, Shimeng & Yang, Xi, 2020. "Property tax limits and female labor supply: Evidence from the housing boom and bust," Journal of Housing Economics, Elsevier, vol. 50(C).
    2. Geng, Xin & Janssens, Wendy & Kramer, Berber, "undated". "Liquid milk: Cash Constraints and Recurring Savings among Dairy Farmers in Kenya," 2018 Annual Meeting, August 5-7, Washington, D.C. 273823, Agricultural and Applied Economics Association.
    3. Wei-Wen Wu & Jian-Fa Li & Cheng-Yih Hong, 2017. "Verifying the Determinants of the Mortgage Defaults on Home Mortgage," International Journal of Economics and Financial Issues, Econjournals, vol. 7(5), pages 266-273.
    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. Miller, Joshua J. & Nikaj, Silda & Lee, Jin Man, 2019. "Reverse mortgages and senior property tax relief," Journal of Housing Economics, Elsevier, vol. 44(C), pages 26-34.
    6. Geng, Xin & Janssens, Wendy & Kramer, Berber, 2023. "Liquid milk: Savings, insurance and side-selling in cooperatives," Journal of Development Economics, Elsevier, vol. 165(C).
    7. Francis Wong, 2024. "Taxing Homeowners Who Won’t Borrow," CESifo Working Paper Series 11185, CESifo.
    8. Hu, Mingzhi & Su, Yinxin, 2025. "Military experience and mortgage stress," International Review of Financial Analysis, Elsevier, vol. 104(PA).
    9. Alaina Barca & Lei Ding & Yulin Hou & David Schwegman, 2021. "Assessment Frequency and Equity of the Real Property Tax: Latest Evidence from Philadelphia," Working Papers 21-43, Federal Reserve Bank of Philadelphia.
    10. Möhlmann, Axel & Vogel, Edgar, 2024. "Late payments on mortgage loans and unemployment: Evidence from a German household panel," Technical Papers 07/2024, Deutsche Bundesbank.
    11. 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.
    12. 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.
    13. Justin C. Contat & William M. Doerner & Michael J. Seiler & Scott Weiner, 2024. "Individual Borrower Motivations Surrounding Mortgage Forbearance Take-up and Exit," FHFA Staff Working Papers 24-11, Federal Housing Finance Agency.
    14. Chris Cunningham & Kristopher Gerardi & Lily Shen, 2021. "The Double Trigger for Mortgage Default: Evidence from the Fracking Boom," Management Science, INFORMS, vol. 67(6), pages 3943-3964, June.
    15. 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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