Payment Size, Negative Equity, and Mortgage Default

By Andreas Fuster, P. Willen. 2017

196 citations recorded by the source corpus.

Surprisingly little is known about the importance of mortgage payment size for default, as efforts to measure the treatment effect of rate increases or loan modifications are confounded by borrower selection. We study a sample of hybrid adjustable-rate mortgages that have experienced substantial rate reductions over the past years and are largely immune to these selection concerns. We find that payment size has an economically large effect on repayment behavior; for instance, cutting the required payment in half reduces the delinquency hazard by about 55 percent. Importantly, the link between payment size and delinquency holds even for borrowers who are significantly underwater on their mortgages. These findings shed light on the driving forces behind default behavior and have important implications for public policy.

Subfields: Accounting, Economics and Econometrics, Finance

View Paper: https://www.semanticscholar.org/paper/e07e7f19fd9b9d9cbe8f31d83b0383d27ee9d9fe

How researchers see this paper

The researchers whose trusted networks rank it highest, strongest advocate first. Every researcher gets a different order.

In Accounting

1. Kyle F. Herkenhoff
2. Lee E. Ohanian
3. Kristopher Gerardi
4. P. Willen
5. John Y. Campbell

In Economics and Econometrics

1. Lee E. Ohanian
2. Kyle F. Herkenhoff
3. Kristopher Gerardi
4. P. Willen
5. John Y. Campbell

In Finance

1. Lee E. Ohanian
2. Kyle F. Herkenhoff
3. Kristopher Gerardi
4. P. Willen
5. John Y. Campbell

Citations in the corpus

• Can't Pay or Won't Pay? Unemployment, Negative Equity, and Strategic Default (2018, methodology): “(42)Other research, including Fuster and Willen (2012) and Hsu et al. (2014) has made a similar point.”
• Failure to Refinance (2016, unknown): “In addition, transfers to homeowners by way of refinancing in the aftermath of a financial crisis can significantly lower the probability of default Fuster and Willen (2015) .”
• Mortgage Design in an Equilibrium Model of the Housing Market (2018, unknown): “…control 32This figure is based on the default hazard in months 30 to 60 in Figure 1, Panel B. Fuster and Willen (2017) measure default as becoming 60 days delinquent rather than actually entering into foreclosure, so the actual default rate might be slightly lower. used by Fuster and Willen (2017).”
• Predictably Unequal? The Effects of Machine Learning on Credit Markets (2020, unknown): “…sensitivity of default probabilities to a 50 basis point change in the interest rate spread at origination (SATO) over the first three years of loan life (i.e., before any interest rate resets occur), using the same hazard model used for the Fuster and Willen (2017) causal estimates.”