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The Changing Pecking Order of Consumer Defaults

31 Pages Posted: 6 Oct 2011 Last revised: 5 Sep 2013

Fredrik Andersson

Office of the Comptroller of the Currency (OCC)

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)

Feng Li

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

Date Written: October 30, 2012

Abstract

In the wake of the recent housing and financial crisis, many have argued that consumers are defaulting on their mortgage for strategic reasons, either because they are "underwater" or to preserve access to credit from other types of debt products, in order to maintain their consumption of other essential goods. In this paper, we examine the extent to which non-prime mortgage borrowers prioritize payments on their monthly mortgage over credit card debt obligations over a nine year period (2001-2009). Before the recent financial crisis, our default order data suggest that consumers were eight times more likely to prioritize payments on mortgage debt over credit card payments. As of late 2008, in contrast, the similar consumers were just as likely to default on mortgage debt as on credit card debt. Our results reveal that important explanations for the observed changes in the pecking order of defaults include: strategic mortgage default behavior among consumers with low and negative housing equity; illiquidity in the form of available credit; the rising costs of servicing mortgage debt; and the greater penetration of non-traditional mortgage products. These results support the importance of strategic consumer behavior, but also emphasize that the changes in the pecking order of defaults have come about because of ability-to-pay considerations.

Keywords: Consumer Credit, Pecking Order of Default, Debt Payment Preferences, Mortgage Debt, Credit Card Debt

JEL Classification: G21, R31, D12

Suggested Citation

Andersson, Fredrik and Chomsisengphet, Souphala and Glennon, Dennis and Li, Feng, The Changing Pecking Order of Consumer Defaults (October 30, 2012). Journal of Money, Credit, and Banking, Vol. 45, No. 2-3, 2013. Available at SSRN: https://ssrn.com/abstract=1939507 or http://dx.doi.org/10.2139/ssrn.1939507

Per Fredrik Daniel Andersson (Contact Author)

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

400 7th St. SW
Washington, DC 20219-0001
United States
202-649-5528 (Phone)
571-465-3246 (Fax)

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)

Feng Li

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

400 7th Street SW
Washington, DC 20219
United States

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