Why Do Borrowers Default on Mortgages? Evidence from High-frequency Data

Pascal Noel, Neubauer Family Assistant Professor of Finance

There are two prevailing theories of borrower default: strategic default -- when debt is too high relative to the value of the house -- and ability-to-pay -- when payments are too high relative to available resources. Using monthly administrative data on income and mortgage default, we develop a new methodology to calculate what fraction of defaults are strategic, in the sense that the borrowers are able to pay their mortgage but choose not to. We find that underwater and abovewater borrowers experience the exact same change in income in the months before default. We show that this is consistent with the ability-to-pay theory explaining nearly all defaults and the strategic theory accounting for essentially no defaults. These results suggest that debt restructuring programs should focus on liquidity provision rather than principal reduction, and that the moral hazard costs of policies designed to help borrowers overburdened with debt are low. 

"Why do Borrowers Default on Mortgages?* with Peter Ganong, Pascal Noel. The Quarterly Journal of Economics, Volume 138, Issue 2, May 2023, Pages 1001–1065,