A Revealed Preference Approach to Estimating Strategic Mortgage Default

48 Pages Posted: 13 Jun 2017

See all articles by Meagan McCollum

Meagan McCollum

University of Tulsa - Collins College of Business

Rajesh Narayanan

Louisiana State University

R. Kelley Pace

Louisiana State University - E.J. Ourso College of Business Administration

Date Written: March 13, 2017

Abstract

Many borrowers make extra principal payments on their mortgages (curtailers). Some of these curtailers subsequently go through foreclosure and lose any benefits from their curtailments. Such curtailers reveal ex-ante non-strategic preferences towards default. We contrast the default sensitivity to leverage of curtailers vis-á-vis noncurtailers to isolate the strategic component of default. Our results show between 2008 and 2012 that the strategic component of default was less than 27% of overall default. We demonstrate robustness of the findings to measures of borrower liquidity, sample compositions, and legal settings that shift the value of strategic default.

Keywords: Mortgages; Strategic Default; Curtailment

Suggested Citation

McCollum, Meagan and Narayanan, Rajesh and Pace, R. Kelley, A Revealed Preference Approach to Estimating Strategic Mortgage Default (March 13, 2017). Available at SSRN: https://ssrn.com/abstract=2985154 or http://dx.doi.org/10.2139/ssrn.2985154

Meagan McCollum (Contact Author)

University of Tulsa - Collins College of Business ( email )

600 South College
Tulsa, OK 74104
United States

Rajesh Narayanan

Louisiana State University ( email )

Baton Rouge, LA 70803-6308
United States
225-578-6236 (Phone)

R. Kelley Pace

Louisiana State University - E.J. Ourso College of Business Administration ( email )

Department of Finance
2164 B Patrick F. Taylor Hall
Baton Rouge, LA 70803-6308
United States
(225)-578-6256 (Phone)
(225)-578-9065 (Fax)

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