The Cost of Consumer Collateral: Evidence from Bunching

57 Pages Posted: 29 Nov 2021 Last revised: 5 Sep 2024

See all articles by Benjamin Collier

Benjamin Collier

Temple University - Risk Management & Insurance & Actuarial Science

Cameron Ellis

Temple University

Benjamin J. Keys

The Wharton School - University of Pennsylvania, Real Estate Department

Multiple version iconThere are 2 versions of this paper

Date Written: November 2021

Abstract

We show that borrowers are highly sensitive to the requirement of posting their homes as collateral. Using administrative loan application and performance data from the U.S. Federal Disaster Loan Program, we exploit a loan amount threshold above which households must post their residence as collateral. One-third of all borrowers select the maximum uncollateralized loan amount, and our bunching estimates suggest that the median borrower is willing to give up 40% of their loan amount to avoid collateral. Exploiting time variation in the loan amount threshold, we find that collateral causally reduces default rates by 35%. Our results help to explain high perceived default costs in the mortgage market, and uniquely quantify the extent to which collateral reduces moral hazard in consumer credit markets.

Suggested Citation

Collier, Benjamin and Ellis, Cameron and Keys, Benjamin J., The Cost of Consumer Collateral: Evidence from Bunching (November 2021). NBER Working Paper No. w29527, Available at SSRN: https://ssrn.com/abstract=3973326

Benjamin Collier (Contact Author)

Temple University - Risk Management & Insurance & Actuarial Science ( email )

Fox School of Business and Management
1301 Cecil B. Moore Ave.
Philadelphia, PA 19122
United States

Cameron Ellis

Temple University ( email )

Philadelphia, PA 19122
United States

Benjamin J. Keys

The Wharton School - University of Pennsylvania, Real Estate Department ( email )

Philadelphia, PA 19104-6330
United States

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