Friday, February 05, 2010

Sunk Costs and Mortgage Default

A paper with Eric Rosenblatt and Vincent Yao. The abstract:

In this paper, we estimate default hazard functions that include standard variables along with borrowers sunk cost: i.e., down payment at loan origination. After testing large numbers of specifications, we find that after controlling for mark-to-market loan-to-value, initial combined loan to value remains an important predictor of default. We also find, contrary to Guiso, Sapienza and Zingales, that there is not a specific point at which one observes a discontinuous default probability, but that it is rather that default is smooth in mark-to-market LTV.

4 comments:

Austin said...

you guys suggest that your results on low down payments raising default are consistent with prospect theory. my paper suggests that the same effect is consistent with a clientele effect - that people who can't save for a down payment are more vulnerable to shocks, for instance. i don't think there's anything in your paper that would allow us to distinguish between these hypotheses.

and thanks for the shout out on my paper, but I'm not sure that the text that cites my paper is even a sentence. not at all sure what you are trying to say there.

Austin said...

BTW - my paper was published in the Journal of Housing Research in 2008 - you still have it listed as a working paper in the Munich archives

http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1330132

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blueberry said...

Thanks for always keeping us updated with comments about sunk costs.
John@Realtors