Working Paper: NBER ID: w21630
Authors: Kris Gerardi; Kyle F. Herkenhoff; Lee E. Ohanian; Paul S. Willen
Abstract: This paper exploits matched data from the PSID on borrower mortgages with income and demographic data to quantify the relative importance of negative equity, versus lack of ability to pay, as affecting default between 2009 and 2013. These data allow us to construct household budgets sets that provide better measures of ability to pay. We use instrumental variables to quantify the impact of ability to pay, including job loss and disability, versus negative equity. Changes in ability to pay have the largest estimated effects. Job loss has an equivalent effect on default likelihood as a 35 percent decline in equity.
Keywords: mortgage default; negative equity; strategic default; ability to pay
JEL Codes: G21; G33; R3; R51
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Ability to pay (G53) | Mortgage default (G33) |
| Job loss (J63) | Mortgage default (G33) |
| Decline in residual income (G33) | Mortgage default (G33) |
| Increase in LTV ratio from 75% to 125% (G32) | Mortgage default for high residual income borrowers (G51) |
| Increase in LTV ratio from 75% to 125% (G32) | Mortgage default for low residual income borrowers (G33) |
| Policies aimed at reducing mortgage payments (G21) | Lower default probabilities (C46) |