The Underlying Determinants of Residential Mortgage Default

Abstract

Mortgage default rates rose dramatically during the recent housing market downturn, increasing from less than 1% to historically high levels. Understanding the rise in mortgage default is critical for many market participants including borrowers, lenders, investors, regulators, and policymakers. We provide a comprehensive analysis of this topic by surveying nearly 100 empirical and theoretical studies related to mortgage default. Topics in the mortgage default literature are reviewed, including (1) the determinants of mortgage termination, (2) the relative termination experience of FRMs and ARMs, (3) screening and signaling equilibriums, and (4) loan loss severity and severity rates. The implications of each topic are discussed for each group of market participants.