Can&Apos;T Pay or Won&Apos;T Pay? Unemployment, Negative Equity, and Strategic Default
74 Pages Posted: 12 Oct 2015 Last revised: 7 Feb 2021
Date Written: October 2015
This paper exploits matched data from the PSID on borrower mortgages with income and demographic data to quantify the relative importance of negative equity, versus lack of ability to pay, as affecting default between 2009 and 2013. These data allow us to construct household budgets sets that provide better measures of ability to pay. We use instrumental variables to quantify the impact of ability to pay, including job loss and disability, versus negative equity. Changes in ability to pay have the largest estimated effects. Job loss has an equivalent effect on default likelihood as a 35 percent decline in equity.
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