New construction and mortgage default

Tom Mayock and Konstantinos Tzioumis

Journal of Banking & Finance, 2021, vol. 133, issue C

Abstract: In this paper we argue that loans collateralized by new construction are more likely to go into default relative to purchase loans for existing homes because of non-linear depreciation schedules and appraisal complications. Using loan-level mortgage records for about 4 million loans originated between 2004 and 2009, we provide strong empirical evidence in support of this hypothesis. The unconditional default rate for mortgages used to purchase new construction was 5 percentage points higher than the default rates for other purchase loans in our sample. In models that include extensive controls for borrower and loan characteristics as well as Census-tract-origination-year fixed effects, we find that loans for new homes were roughly 1.7 percentage points more likely to default, while our instrumental variables analysis suggests that new-home loans are 4.5 percentage points more likely to default.

Keywords: Mortgage default; New houses; Collateral value (search for similar items in EconPapers)
JEL-codes: G01 G21 R14 R52 (search for similar items in EconPapers)
Date: 2021
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jbfina:v:133:y:2021:i:c:s0378426621002326

DOI: 10.1016/j.jbankfin.2021.106276

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