Payment Size, Negative Equity, and Mortgage Default

61 Pages Posted: 9 Dec 2012 Last revised: 26 Jan 2015

See all articles by Andreas Fuster

Andreas Fuster

Swiss National Bank - Financial Stability

Paul Willen

Federal Reserve Bank of Boston - Research Department; National Bureau of Economic Research (NBER)

Multiple version iconThere are 2 versions of this paper

Date Written: January 2015

Abstract

Surprisingly little is known about the importance of mortgage payment size for default, as efforts to measure the treatment effect of rate increases or loan modifications are confounded by borrower selection. We study a sample of hybrid adjustable-rate mortgages that have experienced substantial rate reductions over the past years and are largely immune to these selection concerns. We find that 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 holds even for borrowers who are significantly underwater on their mortgages. These findings shed light on the driving forces behind default behavior and have important implications for public policy.

Keywords: mortgage finance, delinquency, adjustable-rate mortgages, Alt-A

JEL Classification: G21, E43

Suggested Citation

Fuster, Andreas and Willen, Paul S., Payment Size, Negative Equity, and Mortgage Default (January 2015). FRB of New York Staff Report No. 582, Available at SSRN: https://ssrn.com/abstract=2186626 or http://dx.doi.org/10.2139/ssrn.2186626

Andreas Fuster (Contact Author)

Swiss National Bank - Financial Stability ( email )

Boersenstrasse 15
Zurich, CH-8022
Switzerland

Paul S. Willen

Federal Reserve Bank of Boston - Research Department ( email )

600 Atlantic Avenue
Boston, MA 02210
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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