Liquidity problems and early payment default among subprime mortgages
Abstract: The lack of property tax escrow accounts among subprime mortgages causes borrowers to make large lump-sum tax payments that reduce liquidity. Different property tax collection dates across states and counties create exogenous variation in the time between loan origination and the first property tax due date, affording the opportunity to estimate the causal effect of loan-level exposure to liquidity reductions on mortgage default. We find that a nine-month delay in owing property taxes reduces the probability of first-year default by about 4 percent, or about one-third of the effect of a reduction in equity from 10 percent to negative 20 percent.
File(s): File format is text/html http://www.federalreserve.gov/pubs/feds/2011/201109/201109abs.html
File(s): File format is application/pdf http://www.federalreserve.gov/pubs/feds/2011/201109/201109pap.pdf
Part of Series: Finance and Economics Discussion Series
Publication Date: 2011