The Changing Pecking Order of Consumer Defaults

Fredrik Andersson, Souphala Chomsisengphet, Dennis Glennon and Feng Li

Journal of Money, Credit and Banking, 2013, vol. 45, issue 2‐3, 251-275

Abstract: In the wake of the recent housing and financial crisis, many have argued that consumers are defaulting on their mortgage for strategic reasons, either because they are “underwater” or to preserve access to credit from other types of debt products, in order to maintain their consumption of other essential goods. In this paper, we examine the extent to which nonprime mortgage borrowers prioritize payments on their monthly mortgage over credit card debt obligations over a 9‐year period (2001–09). Before the recent financial crisis, our default order data suggest that consumers were eight times more likely to prioritize payments on mortgage debt over credit card payments. As of late 2008, in contrast, the similar consumers were just as likely to default on mortgage debt as on credit card debt. Our results reveal that important explanations for the observed changes in the pecking order of defaults include: strategic mortgage default behavior among consumers with low and negative housing equity, illiquidity in the form of available credit, the rising costs of servicing mortgage debt, and lowered underwriting standards and the greater penetration of nontraditional mortgage products. These results support the importance of strategic consumer behavior, but also emphasize that the changes in the pecking order of defaults have come about because of ability‐to‐pay considerations.

Date: 2013
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Persistent link: https://EconPapers.repec.org/RePEc:wly:jmoncb:v:45:y:2013:i:2-3:p:251-275

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