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Why Mortgage Borrowers Persevere: An Explanation of First and Second Lien Performance Mismatch

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  • Paul S. Calem
  • Robert F. Sarama

Abstract

Borrowers with a pair of mortgages collateralized by the same property sometimes continue to make payments on one while defaulting on the other. We articulate a framework for understanding this performance mismatch that emphasizes two types of borrowers: those with stable equity positions who perceive they are facing moderate or temporary liquidity shocks, and those facing severe financial stress in combination with negative equity. The former have an incentive to enter mismatch and subsequently cure, while the latter would default on both contracts. Our empirical analysis using newly available, national samples of matched first†and second†lien mortgages supports this view.

Suggested Citation

  • Paul S. Calem & Robert F. Sarama, 2017. "Why Mortgage Borrowers Persevere: An Explanation of First and Second Lien Performance Mismatch," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 45(1), pages 28-74, February.
    • Handle: RePEc:bla:reesec:v:45:y:2017:i:1:p:28-74
    DOI: 10.1111/1540-6229.12139
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    Cited by:

    1. Stefano Colonnello & Mariela Dal Borgo, 2024. "Raising Household Leverage: Evidence from Co-Financed Mortgages," Working Papers 2024: 01, Department of Economics, University of Venice "Ca' Foscari".
    2. Kevin Bazer & Sílvio Rendon, 2021. "Individual and Local Effects of Unemployment on Mortgage Defaults," Working Papers 21-39, Federal Reserve Bank of Philadelphia.

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