Show Summary Details

Page of

Printed from Oxford Research Encyclopedias, Economics and Finance. Under the terms of the licence agreement, an individual user may print out a single article for personal use (for details see Privacy Policy and Legal Notice).

date: 09 February 2025

What Causes Residential Mortgage Defaults?locked

What Causes Residential Mortgage Defaults?locked

  • Walter Torous, Walter TorousCenter for Real Estate, Massachusetts Institute of Technology
  • William TorousWilliam TorousStatistics, University of California Berkeley
  • , and Anne ThompsonAnne ThompsonCenter for Real Estate, Massachusetts Institute of Technology

Summary

The U.S. residential mortgage market is very large, totaling approximately $13 trillion in debt as of 2023, and defaults occur with regular frequency, increasing significantly during times of financial stress. For example, during the aftermath of the Great Financial Crisis , almost 1 in 20 U.S. residential mortgages in 2010 were 90 plus days past due and considered in default. Given the adverse implications of default on a household's financial well being and ability to access housing, economists and policy makers have expended much effort to understand why households default on their mortgages. An important issue to resolve in this research is the relative importance of negative equity in a home versus adverse life events in driving mortgage default decisions. Why a household defaults matters. Forgiveness of principal is costly and addresses only defaults related to negative equity. By contrast, to the extent that defaults follow negative life events then lowering monthly mortgage payments while the household resolves its difficulties would allow families to keep their homes while not requiring banks to foreclose on them. To answer these questions requires understanding what factors “cause” mortgage defaults. While many papers document an association between default and various explanatory variables, an association does not necessarily imply causation. For example, it has been empirically documented in the aftermath of the Great Financial Crisis that homeowners residing in warm climates in the United States were more prone to default than homeowners residing in cold climates. Did climate cause mortgage defaults? While there certainly was an association between climate and mortgage defaults, no one has claimed that climate caused homeowners to default. Likewise, previous studies have documented an association, sometimes very strong, between default and negative equity but research based on a potential outcomes framework finds that very few defaults can be causally attributed to strategic reasons in which negative life events are not necessary. The stark difference in these conclusions necessitates a closer examination of what factors cause mortgage defaults. .

Subjects

  • Financial Economics

You do not currently have access to this article

Login

Please login to access the full content.

Subscribe

Access to the full content requires a subscription