Why Do Borrowers Default on Mortgages?

112 Pages Posted: 28 Jul 2020 Last revised: 17 May 2023

See all articles by Peter Ganong

Peter Ganong

University of Chicago; National Bureau of Economic Research (NBER)

Pascal Noel

University of Chicago Booth School of Business

Date Written: July 2020


There are three prevailing theories of mortgage default: strategic default (driven by negative equity), cash-flow default (driven by negative life events), and double-trigger default (where both negative triggers are necessary). It has been difficult to test between these theories in part because negative life events are measured with error. We address this measurement error using a comparison group of borrowers with no strategic default motive. Our central finding is that only 6 percent of underwater defaults are caused exclusively by negative equity, an order of magnitude lower than previously thought. We then analyze the remaining defaults. We find that 70 percent are driven solely by negative life events (i.e., cash-flow defaults), while 24 percent are driven by the interaction between negative life events and negative equity (i.e., double-trigger defaults). Together, the results provide a full decomposition of the three theories underlying borrower default and suggest that negative life events play a central role.

Suggested Citation

Ganong, Peter and Noel, Pascal, Why Do Borrowers Default on Mortgages? (July 2020). NBER Working Paper No. w27585, Available at SSRN: https://ssrn.com/abstract=3661077

Peter Ganong (Contact Author)

University of Chicago ( email )

1101 East 58th Street
Chicago, IL 60637
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Pascal Noel

University of Chicago Booth School of Business ( email )

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