[go: up one dir, main page]
IDEAS home Printed from https://ideas.repec.org/p/fip/fedbqu/qau09-5.html
   My bibliography  Save this paper

Your house or your credit card, which would you choose?: personal delinquency tradeoffs and precautionary liquidity motives

Author

Listed:
  • Ethan Cohen-Cole
  • Jonathan Morse
Abstract
This paper finds strong evidence that many individuals choose to pay credit card bills even at the cost of mortgage delinquencies and foreclosures. While the popular press and some recent literature have suggested that this choice may emerge from steep declines in housing prices, we find evidence that individual-level liquidity concerns are at least as important in the decision. That is, choosing credit cards over housing suggests a precautionary liquidity preference. ; By linking the mortgage delinquency decisions to individual-level credit conditions, we are able to assess the compound impact of reductions in housing prices and retrenchment in the credit markets. Indeed, we find the availability of cash-equivalent credit to be a key component of the default decision. We find that a one standard deviation reduction in housing price changes elicits a change in the predicted probability of mortgage default that is similar in both direction and magnitude to a one standard deviation reduction in available credit (the values are -14.9% and -13.1% respectively). Availability of consumer credit appears important not only as a means of payment, but also as an insurance mechanism for individuals and a shock absorber for the economy as a whole. Our findings are consistent with consumer finance literature that finds individuals have a preference for preserving liquidity - even at significant cost.

Suggested Citation

  • Ethan Cohen-Cole & Jonathan Morse, 2009. "Your house or your credit card, which would you choose?: personal delinquency tradeoffs and precautionary liquidity motives," Supervisory Research and Analysis Working Papers QAU09-5, Federal Reserve Bank of Boston.
    • Handle: RePEc:fip:fedbqu:qau09-5
    as

    Download full text from publisher

    File URL: http://www.bostonfed.org/bankinfo/qau/wp/2009/qau0905.htm
    Download Restriction: no
    File URL: http://www.bostonfed.org/bankinfo/qau/wp/2009/qau0905.htm
    Download Restriction: no
    ---><---

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Li, Xianghong & Zhao, Xinlei, 2016. "Strategic Default Induced by Loan Modification Programs," MPRA Paper 73594, University Library of Munich, Germany.
    2. Christopher Mayer & Edward Morrison & Tomasz Piskorski & Arpit Gupta, 2014. "Mortgage Modification and Strategic Behavior: Evidence from a Legal Settlement with Countrywide," American Economic Review, American Economic Association, vol. 104(9), pages 2830-2857, September.
    3. Ronel Elul & Nicholas S. Souleles & Souphala Chomsisengphet & Dennis Glennon & Robert Hunt, 2010. "What "Triggers" Mortgage Default?," American Economic Review, American Economic Association, vol. 100(2), pages 490-494, May.
    4. Karikari, John A., 2013. "Why homeowners’ documentation went missing under the Home Affordable Mortgage Program (HAMP)?: An analysis of strategic behavior of homeowners and servicers," Journal of Housing Economics, Elsevier, vol. 22(2), pages 146-162.
    5. Donghoon Lee & Christopher Mayer & Joseph Tracy, 2012. "A New Look at Second Liens," NBER Chapters, in: Housing and the Financial Crisis, pages 205-234, National Bureau of Economic Research, Inc.
    6. Trautmann, Stefan T. & Vlahu, Razvan, 2013. "Strategic loan defaults and coordination: An experimental analysis," Journal of Banking & Finance, Elsevier, vol. 37(3), pages 747-760.
    7. Stanga, Irina & Vlahu, Razvan & de Haan, Jakob, 2020. "Mortgage arrears, regulation and institutions: Cross-country evidence," Journal of Banking & Finance, Elsevier, vol. 118(C).
    8. Bos, Marieke & Le Coq, Chloé & van Santen, Peter, 2016. "Economic Scarcity and Consumers’ Credit Choice," Working Paper Series 329, Sveriges Riksbank (Central Bank of Sweden).
    9. Lei Ding, 2017. "Borrower credit access and credit performance after loan modifications," Empirical Economics, Springer, vol. 52(3), pages 977-1005, May.

    More about this item

    Keywords

    Finance; Personal; Credit cards; Liquidity (Economics); Mortgage loans;
    All these keywords.

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:fip:fedbqu:qau09-5. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no bibliographic references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Spozio (email available below). General contact details of provider: https://edirc.repec.org/data/frbbous.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.