Wednesday, August 26, 2015

Chan et al. on the interconnection of household debts


"Determinants of Mortgage Default and Consumer Credit Use: The Effects of Foreclosure Laws and Foreclosure Delays" Free Download 
FRB of New York Working Paper No. FEDNSR732

SEWIN CHANNew York University (NYU) - Robert F. Wagner Graduate School of Public Service
ANDREW T. HAYASHIUniversity of Virginia - School of Law
ANDREW HAUGHWOUTFederal Reserve Bank of New York
WILBERT VAN DER KLAAUWFederal Reserve Banks - Federal Reserve Bank of New York

The mortgage default decision is part of a complex household credit management problem. We examine how factors affecting mortgage default spill over to other credit markets. As home equity turns negative, homeowners default on mortgages and HELOCs at higher rates, whereas they prioritize repaying credit cards and auto loans. Larger unused credit card limits intensify the preservation of credit cards over housing debt. Although mortgage non-recourse statutes increase default on all types of housing debt, they reduce credit card defaults. Foreclosure delays increase default rates for both housing and non-housing debts. Our analysis highlights the interconnectedness of debt repayment decisions

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