New Construction and Mortgage Default

58 Pages Posted: 28 Sep 2017 Last revised: 24 Apr 2021

See all articles by Tom Mayock

Tom Mayock

UNC Charlotte

Konstantinos Tzioumis

ALBA Graduate Business School

Date Written: April 21, 2021

Abstract

In this paper we argue that loans collateralized by new construction are more likely to go into default relative to purchase loans for existing homes because of non-linear depreciation schedules and appraisal complications. Using loan-level mortgage records for about 4 million loans originated between 2004 and 2009, we provide strong empirical evidence in support of this hypothesis. The unconditional default rate for mortgages used to purchase new construction was 5 percentage points higher than the default rates for other purchase loans in our sample. In models that include extensive controls for borrower and loan characteristics as well as Census-tract-origination-year fixed effects, we find that loans for new homes were roughly 1.7 percentage points more likely to default, while our instrumental variables analysis suggests that new-home loans are 4.5 percentage points more likely to default.

Keywords: Mortgage Default, New Houses, Collateral Value

JEL Classification: G01, G21, R14, R52

Suggested Citation

Mayock, Tom and Tzioumis, Konstantinos, New Construction and Mortgage Default (April 21, 2021). Available at SSRN: https://ssrn.com/abstract=3043559 or http://dx.doi.org/10.2139/ssrn.3043559

Tom Mayock (Contact Author)

UNC Charlotte ( email )

Charlotte, NC 28223
United States

Konstantinos Tzioumis

ALBA Graduate Business School ( email )

6-8 Xenias St.
Athens, 11528
Greece

HOME PAGE: http://www.alba.acg.edu/faculty-research/about-alba-faculty/core-faculty/kostas-tzioumis/

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