What 'Triggers' Mortgage Default?

15 Pages Posted: 29 Apr 2010 Last revised: 13 Dec 2011

See all articles by Ronel Elul

Ronel Elul

Federal Reserve Bank of Philadelphia

Nicholas S. Souleles

University of Pennsylvania - Finance Department; National Bureau of Economic Research (NBER)

Souphala Chomsisengphet

Office of the Comptroller of the Currency (OCC)

Dennis Glennon

Government of the United States of America - Office of the Comptroller of the Currency (OCC)

Robert M. Hunt

Consumer Finance Institute, Federal Reserve Bank of Philadelphia

Date Written: April 1, 2010

Abstract

This paper assesses the relative importance of two key drivers of mortgage default: negative equity and illiquidity. To do so, the authors combine loan-level mortgage data with detailed credit bureau information about the borrower's broader balance sheet. This gives them a direct way to measure illiquid borrowers: those with high credit card utilization rates. The authors find that both negative equity and illiquidity are significantly associated with mortgage default, with comparably sized marginal effects. Moreover, these two factors interact with each other: The effect of illiquidity on default generally increases with high combined loan-to-value ratios (CLTV), though it is significant even for low CLTV. County-level unemployment shocks are also associated with higher default risk (though less so than high utilization) and strongly interact with CLTV. In addition, having a second mortgage implies significantly higher default risk, particularly for borrowers who have a first-mortgage LTV approaching 100 percent.

Keywords: Mortgages, Mortgage Default, Negative Equity, Illiquidity, Double Trigger, Consumer Credit, Household Finance

JEL Classification: D12, D14, E51, G21, G33, L85, R31

Suggested Citation

Elul, Ronel and Souleles, Nicholas S. and Chomsisengphet, Souphala and Glennon, Dennis and Hunt, Robert M., What 'Triggers' Mortgage Default? (April 1, 2010). FRB of Philadelphia Working Paper No. 10-13. Available at SSRN: https://ssrn.com/abstract=1596707 or http://dx.doi.org/10.2139/ssrn.1596707

Ronel Elul (Contact Author)

Federal Reserve Bank of Philadelphia ( email )

Ten Independence Mall
Philadelphia, PA 19106-1574
United States
215-574-3965 (Phone)

Nicholas S. Souleles

University of Pennsylvania - Finance Department ( email )

The Wharton School
3620 Locust Walk
Philadelphia, PA 19104
United States
215-898-9466 (Phone)
215-898-6200 (Fax)

HOME PAGE: http://finance.wharton.upenn.edu/~souleles

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Souphala Chomsisengphet

Office of the Comptroller of the Currency (OCC) ( email )

400 7th Street, SW
Washington, DC 20219
United States
202-649-5533 (Phone)

Dennis Glennon

Government of the United States of America - Office of the Comptroller of the Currency (OCC) ( email )

250 E Street, SW
Senior Financial Economist; Economics Department
Washington, DC 20219-0001
United States
202-874-4725 (Phone)
202-874-5394 (Fax)

Robert M. Hunt

Consumer Finance Institute, Federal Reserve Bank of Philadelphia ( email )

Ten Independence Mall
Philadelphia, PA 19106-1574
United States
215-574-3806 (Phone)
215-574-7101 (Fax)

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