NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH
loading...

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

Peter Ganong, Pascal J. Noel

NBER Working Paper No. 27585
Issued in July 2020
NBER Program(s):Corporate Finance, Public Economics

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.

You may purchase this paper on-line in .pdf format from SSRN.com ($5) for electronic delivery.

Access to NBER Papers

You are eligible for a free download if you are a subscriber, a corporate associate of the NBER, a journalist, an employee of the U.S. federal government with a ".GOV" domain name, or a resident of nearly any developing country or transition economy.

If you usually get free papers at work/university but do not at home, you can either connect to your work VPN or proxy (if any) or elect to have a link to the paper emailed to your work email address below. The email address must be connected to a subscribing college, university, or other subscribing institution. Gmail and other free email addresses will not have access.

E-mail:

Machine-readable bibliographic record - MARC, RIS, BibTeX

Document Object Identifier (DOI): 10.3386/w27585

 
Publications
Activities
Meetings
NBER Videos
Themes
Data
People
About

National Bureau of Economic Research, 1050 Massachusetts Ave., Cambridge, MA 02138; 617-868-3900; email: info@nber.org

Contact Us