A Revealed Preference Approach to Estimating Strategic Mortgage Default
48 Pages Posted: 13 Jun 2017
Date Written: March 13, 2017
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
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