Over the past 10 years, the Bank’s Research Department1 has worked very closely with the Payment Cards Center, both in developing the center and contributing to its research agenda. The center’s current director, Bob Hunt, joined the center from the Research Department, where he served as a senior economist doing research on consumer payments, consumer finance, and the economics of innovation. Recently, Hunt contributed to a Research Department working paper,2 “What ‘Triggers’ Mortgage Default?,” along with coauthors Ronel Elul, Research Department; Nicholas Souleles, visiting scholar in the Research Department and the Payment Cards Center; and Souphala Chomsisengphet and Dennis Glennon, both of the Office of the Comptroller of the Currency. Below is an abstract of the working paper, which can be found on the center’s website.
Abstract: This paper assesses the relative importance of two key drivers of mortgage default: negative home equity and illiquidity. We combine loan-level mortgage data with detailed credit bureau information about the borrower’s broader balance sheet. This gives us a direct way to measure illiquid borrowers: those with high credit card utilization rates. Both negative home equity and illiquidity are associated with higher mortgage default rates, with comparably sized marginal effects. Moreover, these two factors interact with each other: The effect of illiquidity on default generally increases with high combined loan-to-value ratios (CLTV), though it is significant even for low CLTV. County-level unemployment shocks are also associated with higher default risk (though less so than high utilization) and strongly interact with CLTV. In addition, having a second mortgage implies significantly higher default risk, particularly for borrowers who have a first-mortgage LTV approaching 100 percent.