Price Depreciation is a Leading Cause Default

The Boston Fed released a report last week that found home price depreciation is a leading cause of mortgage default. This challenges the common arguments that attribute rising delinquencies to unaffordable mortgage payments.

“We find that the DTI ratio at the time of origination is not a strong predictor of future mortgage default,” the report said. “A simple theoretical model explains this result.” It went on to say, “While a higher monthly payment makes default more likely, other factors, such as the level of house prices, expectations of future house price growth and intertemporal variation in household income, matter as well.”

The economists estimated that a 10 percent decrease in income increases the probability of 90-day delinquency by just seven to 11 percent. A one percent increase in the unemployment rate raises this probability by 10-20 percent. Yet, a 10 percent fall in home prices raises the probability of a 90-day delinquency by more than half.

Given that modification programs currently focus on getting a struggling borrower’s housing payment down to a specific debt ratio, this may also explain why the likelihood of re-default is exceedingly high.