American Economic Journal:
Economic Policy
ISSN 1945-7731 (Print) | ISSN 1945-774X (Online)
Payment Size, Negative Equity, and Mortgage Default
American Economic Journal: Economic Policy
vol. 9,
no. 4, November 2017
(pp. 167–91)
Abstract
This paper studies the treatment effect of monthly payment size on mortgage default, using a sample of adjustable-rate loans that experienced large payment reductions thanks to the recent low interest rate environment. 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 is equally strong for borrowers that are significantly underwater on their mortgage. Relying on payment reductions for identification circumvents the selection concerns due to prepayments that would be associated with rate increases.Citation
Fuster, Andreas, and Paul S. Willen. 2017. "Payment Size, Negative Equity, and Mortgage Default." American Economic Journal: Economic Policy, 9 (4): 167–91. DOI: 10.1257/pol.20150007Additional Materials
JEL Classification
- D14 Household Saving; Personal Finance
- G21 Banks; Depository Institutions; Micro Finance Institutions; Mortgages
- R31 Housing Supply and Markets
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