Strategic consumer default: Mortgage versus consumer debt

Following the collapse of subprime mortgage and the subsequent economicrecession, the U.S. households face a hard time with millions of homes underwaterand rising delinquency rates both on mortgage and consumer loans. For a typical U.S.household, mortgage and consumer debt are the most important payment instrumentsavailable to manage their daily finances. However, the decisions about which debtobligation to honor or to default sometimes can be not so obvious, and little is knownon how borrows make payment decisions strategically. This paper will shed somelight on understanding borrowers’ strategic delinquency behavior given mortgage andconsumer debt using a rich survey dataset from Consumer Finance Monthly from2005 to 2010—a time span that covers the most recent economic recession triggeredby subprime mortgage collapse.The six major findings here include: (1) higher current loan-to-value ratios notonly contribute to higher probability of default on mortgages but also to highprobability of default on consumer loans; (2) the more underwater a home is, the morelikely a homeowner will decide to go delinquent on mortgage rather than consumerdebt; (3) households with less assets are more vulnerable to mortgage delinquencywhen their home value goes underwater compare to their wealthy counterparts; (4)credit constrained borrowers are more likely to default on both mortgage andconsumer debt, but as consumers become increasingly credit constrained, they aremore willing to default on mortgage payments instead of consumer loans—evidencethat liquidity is an incentive for borrowers to avoid delinquency in consumer loans; (5)state level macroeconomic indicators, such as a change in the house price index orunemployment rate, contribute to a higher probability of both mortgage delinquencyand consumer loan delinquency;(6) consumer loan delinquency makes borrowersmore stressed out compared to mortgage delinquency.