Default Costs and Repayment of Underwater Mortgages
Jan K. Brueckner,
James N. Conklin,
N. Edward Coulson and
Moussa Diop
No 10755, CESifo Working Paper Series from CESifo
Abstract:
This paper explores an overlooked phenomenon in mortgage markets: repayment of underwater mortgages. Since repayment in this case requires the borrower to use out-of-pocket funds along with the proceeds from the house sale to settle the loan, it may appear unattractive and even irrational. But if the borrower’s negative equity is less than the cost of default, which includes credit impairment and possible guilt, repayment of an underwater mortgage is a wealth-maximizing strategy. The paper shows that such repayment indeed occurs, and that it is affected by the same factors commonly used in previous studies of default: the magnitude of home equity and the borrower’s credit score, which captures default cost. An increase in either variable raises the likelihood that the underwater loan is terminated by repayment rather than by default. In addition, the paper also generates an estimate of the magnitude of default cost, showing that it rises with borrower credit worthiness, a finding that is new to the literature.
Keywords: default; prepayment; mortgages (search for similar items in EconPapers)
JEL-codes: G51 (search for similar items in EconPapers)
Date: 2023
New Economics Papers: this item is included in nep-ban and nep-ure
References: View references in EconPapers View complete reference list from CitEc
Citations:
Downloads: (external link)
https://www.cesifo.org/DocDL/cesifo1_wp10755.pdf (application/pdf)
Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.
Export reference: BibTeX
RIS (EndNote, ProCite, RefMan)
HTML/Text
Persistent link: https://EconPapers.repec.org/RePEc:ces:ceswps:_10755
Access Statistics for this paper
More papers in CESifo Working Paper Series from CESifo Contact information at EDIRC.
Bibliographic data for series maintained by Klaus Wohlrabe (wohlrabe@ifo.de).