I Promise To Pay

Abstract

Consumers are more likely to keep a repayment promise they make themselves. When a scheduling conflict prevents a borrower from attending a mortgage closing, a Power of Attorney (POA) empowers a third party to promise that the borrower will repay the loan. On a matched sample of POA and non-POA loans, and comparing within-borrower and within-property, I link POAs to greater delinquency and foreclosure. POAs are uncorrelated with cash flow shocks but reflect reduced promise-keeping upon undergoing financial distress. This association vanishes for originator-servicer loans, suggesting financial intermediation plays a role in consumer lending.

Keywords: consumer, promise, mortgage, default, power of attorney

JEL Classification: D12, D18, K12, G21, H31, R20