Borrower Expectations and Mortgage Performance: Evidence from the COVID-19 Pandemic

William Larson, Christos Makridis and Chad Redmer ()

No 21-02, FHFA Staff Working Papers from Federal Housing Finance Agency

Abstract: We assess issues related to borrower beliefs and mortgage performance using new individual panel data that simultaneously cover borrower expectations, forbearance status during the COVID-19 pandemic, and a wide array of demographic characteristics. First, we establish the determinants of borrower expectations, with local experiences and those of social networks playing important roles. We then show that households who, at origination, were optimistic about future house price appreciation or pessimistic about the possibility of future unemployment were more likely to enter forbearance in 2020. However, by early-2021, appreciation-optimistic borrowers who were in forbearance were likely to have cured or prepaid their loan, while those who expected unemployment were likely to still be in forbearance. We offer three channels by which expectations affect forbearance behavior: choices of initial loan terms, associations with actual future events, and factors related to belief formation that are also plausibly associated with forbearance. Our findings highlight the crucial role borrower expectations play in both leverage choices and mortgage performance.

Keywords: Behavioral Economics; Employment; Forbearance; Expectations (search for similar items in EconPapers)
JEL-codes: E21 E32 G41 G51 R31 (search for similar items in EconPapers)
Pages: 54 pages
Date: 2021-10
New Economics Papers: this item is included in nep-ban, nep-mac and nep-ure
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