Income Stability and Mortgage Default

Abstract

Debate exists on the relative importance of employment status and house price declines in accounting for the large number of mortgage defaults during the Great Recession. To avoid the complexities posed by potential interactions among house prices, employment status, and income, we propose the natural experiment of examining the default decisions of homeowners with job security and income stability. Specifically, we observe public sector workers employed in Clark County, Nevada in FY2009-2010 and examine the sensitivity of their default decisions to changes in house values relative to borrowers in the private sector. Compared to the overall population, homeowners with known employment and income stability exhibit both a lower rate of default as well as a lower sensitivity to mortgage leverage in their default decisions.