Why Do Borrowers Default on Mortgages? / Peter Ganong, Pascal J. Noel.

Format:

Book

Author/Creator:

Ganong, Peter.

Contributor:

National Bureau of Economic Research.

Noel, Pascal J.

Series:

Working Paper Series (National Bureau of Economic Research) no. w27585.

NBER working paper series no. w27585

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2020.

Summary:

There are three prevailing theories of mortgage default: strategic default (driven by negative equity), cash-flow default (driven by negative life events), and double-trigger default (where both negative triggers are necessary). It has been difficult to test between these theories in part because negative life events are measured with error. We address this measurement error using a comparison group of borrowers with no strategic default motive. Our central finding is that only 6 percent of underwater defaults are caused exclusively by negative equity, an order of magnitude lower than previously thought. We then analyze the remaining defaults. We find that 70 percent are driven solely by negative life events (i.e., cash-flow defaults), while 24 percent are driven by the interaction between negative life events and negative equity (i.e., double-trigger defaults). Together, the results provide a full decomposition of the three theories underlying borrower default and suggest that negative life events play a central role.

Notes:

Print version record

July 2020.