The Third Trigger of Strategic Default: Households’ Portfolio Composition

Shotaro Watanabe, Gianluca Marcato and Bing Zhu

ERES from European Real Estate Society (ERES)

Abstract: This paper investigates the relationship between strategic default in the US residential mortgage market and household portfolio composition after the Great Recession in 2007. Following the definition of strategic default proposed by Gerardi et al. (2018), we find that in addition to the well-known ‘Double Triggers’ – negative equity and payment ability – households’ portfolio composition can also affect their strategic default decision. Holding a larger amount of non-housing durable assets increases the probability of strategic default, while owning more liquid assets can reduce it through two channels: portfolio rebalancing and relative cost of default.

Keywords: Household Finance; Mortgage; Negative Equity; Strategic Default (search for similar items in EconPapers)
JEL-codes: R3 (search for similar items in EconPapers)
Date: 2021-01-01
New Economics Papers: this item is included in nep-ban, nep-isf, nep-rmg and nep-ure
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Persistent link: https://EconPapers.repec.org/RePEc:arz:wpaper:eres2021_203

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