Determinants of Mortgage Default and Consumer Credit Use: The Effects of Foreclosure Laws and Foreclosure Delays

Abstract

The mortgage default decision is part of a complex household credit management problem. We examine how factors affecting mortgage default spill over to other credit markets. As home equity turns negative, homeowners default on mortgages and HELOCs at higher rates, whereas they prioritize repaying credit cards and auto loans. Larger unused credit card limits intensify the preservation of credit cards over housing debt. Although mortgage non-recourse statutes increase default on all types of housing debt, they reduce credit card defaults. Foreclosure delays increase default rates for both housing and non-housing debts. Our analysis highlights the interconnectedness of debt repayment decisions.

Ethical Behaviors and Wealth: Generation Y’s Experience

“…Borrowing money is associated with moral hazard, especially for loans not backed by collateral. Borrowers sometimes strategically default, which means they walk away from a debt despite having the ability to pay (Bradley, Cutts, & Liu, 2015;Chan, Haughwout, Hayashi, & Van Der Klaauw, 2016). While defaulting on credit card debt typically hurts an individual's credit card score for some years, lenders holding unsecured debt can do little beyond restricting access to future credit and harassing borrowers (Ausubel, 1997;Lopes, 2008).…”

Borrower credit access and credit performance after loan modifications

“…The second hypothesis is that, depending on the level of increased probability of keeping their homes gained from a loan modification, homeowners could be more likely to prioritize their home mortgages over payments on other credit accounts. Consumer finance literature has examined the choice between prioritizing mortgage payments or payments on other accounts (Cohen-Cole and Morse 2010; Jagtiani and Lang 2011; Andersson et al 2013;Chan et al 2015).…”

Missing the Mark: House Price Index Accuracy and Mortgage Credit Modeling

“…24 LTV ratios exceeding one indicate negative equity, where the borrower is underwater or owes more than the value of the underlying housing asset. Negative equity can lead homeowners to significantly cut back on improvements as well as mortgage principal payments (Olney, 1999;Melzer, 2013) and substantial evidence indicates borrowers strategically default when houses go underwater (Deng, Quigley, and Van Order, 2000;Bajari, Chu, and Park, 2008;Bhutta, Dokko, and Shan, 2010;Ghent and Kudlyak, 2011;Guiso, Sapienza, and Zingales, 2013;Chan, Haughwout, Hayashi, and van der Klaauw). All of these studies focus on the LTV ratio, which is composed of two parts-loan amount and house value-both crucial to the construction of an accurate measure.…”