Why Do Borrowers Default on Mortgages? A New Method For Causal Attribution

Peter Ganong and Pascal Noel ()
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Pascal Noel: University of Chicago - Booth School of Business

No 2020-100, Working Papers from Becker Friedman Institute for Research In Economics

Abstract: There are two prevailing theories of borrower default: strategic default—when debt is too high relative to the value of the house—and adverse life events—such that the monthly payment is too high relative to available resources. It has been challenging to test between these theories in part because adverse events are measured with error, possibly leading to attenuation bias. We develop a new method for addressing this measurement error using a comparison group of borrowers with no strategic default motive: borrowers with positive home equity. We implement the method using high-frequency administrative data linking income and mortgage default. Our central finding is that only 3 percent of defaults are caused exclusively by negative equity, much less than previously thought; in other words, adverse events are a necessary condition for 97 percent of mortgage defaults. Although this finding contrasts sharply with predictions from standard models, we show that it can be rationalized in models with a high private cost of mortgage default.

JEL-codes: E20 G21 R21 (search for similar items in EconPapers)
Pages: 68 pages
Date: 2020
New Economics Papers: this item is included in nep-cwa, nep-mac and nep-ure
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Citations: View citations in EconPapers (16)

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