![]() 2016), we construct the first dataset that matches detailed household economic and demographic information with homeowner mortgage characteristics data. ![]() These data did not provide information to allow researchers to measure homeowners’ ability to pay, such as household income, employment status, assets, or non-mortgage liabilities. Most previous studies have been conducted using only mortgage default and loan characteristic data. For example, if a defaulter is both unemployed and has negative equity, is that homeowner defaulting for strategic or ability-to-pay reasons?Ĭonfronting these issues requires matched data that allow researchers to measure the borrower's ability to pay as well as mortgage status. If we don't know anything about the owners' ability to pay their mortgages, it is difficult even to identify default. This means that negative equity, and factors that negatively affect the ability to pay such as job loss, are likely to be highly correlated. It is hard to disentangle the contributions of ability to pay and negative equity to decisions to default, because default waves tend to occur around periods of macroeconomic weakness, such as the financial crisis of 2007-2009 and its aftermath. (2008) found that equity alone was not a very accurate predictor of default, and Gyourko and Tracy (2013) presented evidence that estimated default probabilities based only on negative equity may be biased because the calculations omit ability-to-pay variables. It finds that negative equity is the main driver of defaults, but at the same time acknowledges that factors such as liquidity or ability to pay are potentially important. Instead, it focuses on the role of negative equity (Vandell 1995, Deng et al. Lack of data has meant that much of the research has omitted the effect of the owner's ability to pay. In this case homeowners have the ability to pay but choose to default because they have high negative equity.ĭespite a lot of research on the determinants of mortgage default, we don't know for sure the relative importance of ability to pay and strategic motivations. The other is negative equity, often referred to as 'strategic default'. One is a lack of liquidity – homeowners no longer have the ability to pay their mortgage because they have suffered a significant negative income or expenditure shock. Why do homeowners default on their mortgage? Goodman et al. ![]()
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