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

70 Pages Posted: 28 Jul 2020

See all articles by Peter Ganong

Peter Ganong

University of Chicago; National Bureau of Economic Research (NBER)

Pascal Noel

University of Chicago Booth School of Business

Date Written: July 2020

Abstract

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.

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Suggested Citation

Ganong, Peter and Noel, Pascal, Why Do Borrowers Default on Mortgages? A New Method for Causal Attribution (July 2020). NBER Working Paper No. w27585, Available at SSRN: https://ssrn.com/abstract=3661077

Peter Ganong (Contact Author)

University of Chicago ( email )

1101 East 58th Street
Chicago, IL 60637
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Pascal Noel

University of Chicago Booth School of Business ( email )

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