This paper studies the treatment effect of monthly payment size on mortgage default, using a sample of adjustable-rate loans that experienced large payment reductions thanks to the recent low interest rate environment. Payment size has an economically large effect on repayment behavior; for instance, cutting the required payment in half reduces the delinquency hazard by about 55 percent. Importantly, the link between payment size and delinquency is equally strong for borrowers that are significantly underwater on their mortgage. Relying on payment reductions for identification circumvents the selection concerns due to prepayments that would be associated with rate increases.
Fuster, Andreas, and Paul S. Willen.
"Payment Size, Negative Equity, and Mortgage Default."
American Economic Journal: Economic Policy,
Household Saving; Personal Finance
Banks; Depository Institutions; Micro Finance Institutions; Mortgages
Housing Supply and Markets