What \"triggers\" mortgage default?

Souphala Chomsisengphet, Ronel Elul, Robert Hunt and Nicholas Souleles

No 10-13, Working Papers from Federal Reserve Bank of Philadelphia

Abstract: This paper assesses the relative importance of two key drivers of mortgage default: negative equity and illiquidity. To do so, the authors combine loan-level mortgage data with detailed credit bureau information about the borrower's broader balance sheet. This gives them a direct way to measure illiquid borrowers: those with high credit card utilization rates. The authors find that both negative equity and illiquidity are significantly associated with mortgage default, with comparably sized marginal effects. Moreover, these two factors interact with each other: The effect of illiquidity on default generally increases with high combined loan-to-value ratios (CLTV), though it is significant even for low CLTV. County-level unemployment shocks are also associated with higher default risk (though less so than high utilization) and strongly interact with CLTV. In addition, having a second mortgage implies significantly higher default risk, particularly for borrowers who have a first-mortgage LTV approaching 100 percent.

Keywords: Mortgages; Default (Finance) (search for similar items in EconPapers)
Date: 2010
New Economics Papers: this item is included in nep-ban, nep-rmg and nep-ure
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Citations: View citations in EconPapers (81)

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Journal Article: What "Triggers" Mortgage Default? (2010)
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