Essays on Mortgage Debt Payment

Abstract

In this dissertation, I offer three independent studies that each contribute to the literature on mortgage debt payment. In the first paper, I examine the recent phenomenon of mortgage curtailment (borrowers making voluntary partial prepayments) and link this behavior to consumer deleveraging trends. In the second paper, I use the curtailment measures developed in the first essay to examine heterogeneity in sensitivity to current mortgage leverage in default decisions. Considering the group of borrowers who have previously curtailed mortgage debt, I posit such borrowers should be less sensitive to current leverage than borrowers without past curtailments because previous curtailers have revealed a lower value on the embedded option to default on their loan because to do so would forfeit the full amount of past partial prepayments. Indeed, I show that for borrowers estimated to have negative equity positions, borrowers with past curtailments have approximately 30-50% less sensitivity to current leverage than borrowers who have never made extra payments. Finally, in the third essay I examine the role of income stability in mortgage default decisions. I study default decisions in a sample of borrowers (governmental employees from Clark County NV, FY2009--2010) whose current employment and income is known with certainty and future prospects for continued employment are above average. I find that while the group with known employment has a lower default rate than the remainder of homeowners (whose employment status is unknown), but both groups have the same sensitivity to mortgage leverage. Both the second and third studies provide evidence of strategic default behavior in the residential mortgage market and suggest that when faced with a wave of mortgage defaults, investors and policymakers cannot provide solutions targeted towards ability to pay without addressing declines in asset values.