Residential Mortgage Default Forecasting: How Much Do Price Trends Matter? Part 1
Default rates on mortgage loans are driven by a number of factors, including but not limited to the following:
1. Income to mortgage payment ratio
2. Credit behavior and attitudes toward paying obligations as reflected in credit scores
3. Loss of a job or unexpected medical expense
4. Available liquid assets that may be tapped for mortgage payments
5. Perceived and/or actual equity in the home as reflected in current values
While all of the above are important, the last factor seems to dominate all the others. Home equity is a function of current market value and the loan-to-value (LTV) ratio of the original mortgage, along with any other debt added during ownership, such as second mortgages and home equity lines of credit, (HELOC). Here we focus on this last factor, home equity.
Sklarz, Michael; Miller, Norman; and Pennington-Cross, Anthony, "Residential Mortgage Default Forecasting: How Much Do Price Trends Matter? Part 1" (2018). Finance Faculty Research and Publications. 134.