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I Promise to Pay

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  • Joshua Mitts

Abstract

Consumers are more likely to keep a repayment promise they make themselves. When a scheduling conflict prevents a borrower from attending a mortgage closing, a power of attorney (POA) empowers a third party to promise that the borrower will repay the loan. On a matched sample of POA and non-POA loans, and comparing within borrower and within property, I link POAs to greater delinquency and foreclosure. Although POAs are uncorrelated with cash flow shocks, they reflect reduced promise keeping when borrowers undergo financial distress. This association vanishes for originator-servicers' loans, which suggests that financial intermediation plays a role in consumer lending.

Suggested Citation

  • Joshua Mitts, 2019. "I Promise to Pay," Journal of Law and Economics, University of Chicago Press, vol. 62(1), pages 117-149.
    • Handle: RePEc:ucp:jlawec:doi:10.1086/701194
    DOI: 10.1086/701194
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