Why Mortgage Borrowers Persevere: An Explanation of First and Second Lien Performance Mismatch

47 Pages Posted: 20 Jan 2017

See all articles by Paul S. Calem

Paul S. Calem

Federal Reserve Banks - Federal Reserve Bank of Philadelphia

Robert Sarama

Board of Governors of the Federal Reserve System

Date Written: Spring 2017

Abstract

Borrowers with a pair of mortgages collateralized by the same property sometimes continue to make payments on one while defaulting on the other. We articulate a framework for understanding this performance mismatch that emphasizes two types of borrowers: those with stable equity positions who perceive they are facing moderate or temporary liquidity shocks, and those facing severe financial stress in combination with negative equity. The former have an incentive to enter mismatch and subsequently cure, while the latter would default on both contracts. Our empirical analysis using newly available, national samples of matched first‐ and second‐lien mortgages supports this view.

Suggested Citation

Calem, Paul S. and Sarama, Robert, Why Mortgage Borrowers Persevere: An Explanation of First and Second Lien Performance Mismatch (Spring 2017). Real Estate Economics, Vol. 45, Issue 1, pp. 28-74, 2017, Available at SSRN: https://ssrn.com/abstract=2902383 or http://dx.doi.org/10.1111/1540-6229.12139

Paul S. Calem (Contact Author)

Federal Reserve Banks - Federal Reserve Bank of Philadelphia ( email )

Ten Independence Mall
Philadelphia, PA 19106-1574
United States

Robert Sarama

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

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