Till Debt Do Us Part: Strategic Divorces and a Test of Moral Hazard

Yeorim Kim (), Mauro Mastrogiacomo (), Stefan Hochguertel () and Hans Bloemen ()
Additional contact information
Yeorim Kim: Vrije Universiteit Amsterdam
Mauro Mastrogiacomo: De Nederlandsche Bank
Stefan Hochguertel: Vrije Universiteit Amsterdam

No 15446, IZA Discussion Papers from Institute of Labor Economics (IZA)

Abstract: We test whether households that face prospective home equity losses during a house price downturn use divorce to shed debt. We study the Dutch context, where qualifying homeowners can buy into a mortgage guarantee scheme that insures the lender against borrower default and transfers the risk to the public. Divorce is one of the major events that obliges the guarantor to repay outstanding residual debt after (foreclosure) sale. We argue in this paper that divorce is endogenous to holding underwater mortgages, and hence constitutes a choice that can be used for strategic use of the insurance. Using administrative data, we find a significant, 44% increase in the probability to divorce for households with an underwater mortgage. This effect is causal to being insured. The identification relies on a regression discontinuity design, that exploits the fact that the insurance is only available for properties with values below a legislated qualification threshold. The house price crisis (2008-2013) provides an unexpected shock to house values, leaving about 40% of owners with an underwater mortgage. Their home equity averages to about €-50.000. Couples with similar characteristics just above the qualification threshold experienced significantly less often a divorce than couples just below the threshold. We interpret this behavioral response as moral hazard, also because the induced divorcees reunite at a higher rate than other divorcees.

Keywords: moral hazard; mortgage insurance; divorce (search for similar items in EconPapers)
JEL-codes: D10 G21 G52 J12 (search for similar items in EconPapers)
Pages: 31 pages
Date: 2022-07
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: View citations in EconPapers (1)

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Related works:
Working Paper: Till debt do us part: strategic divorces and a test of moral hazard (2022)
Working Paper: Till debt do us part: strategic divorces and a test of moral hazard (2022)
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