Deleveraging and mortgage curtailment

Abstract

Using monthly loan-level data, individual partial prepayments (curtailments) from January 2001 to June 2011 are observed for mortgages in twenty metropolitan statistical areas. Contrary to some earlier assertions, American homeowners now frequently commit funds towards their mortgage payments in excess of the amount due; over 30% of loans outstanding have made at least one curtailment payment. After controlling for borrower and loan-level variables, we show that the latent propensity to curtail has steadily risen from 2003 to 2006 and remains at elevated levels. Therefore, curtailment provides an example of consumer deleveraging behavior that began prior to the Great Recession.

How do Interest Rate Changes Affect Mortgage Curtailments? Evidence from China

“…Using data from the Federal Reserve's Survey of Consumer Finances, Adelman, Cross and Shrider (2010) investigate why homeowners make mortgage curtailments and find that the propensity to save is the most powerful and significant factor in predicting the probability of curtailment. McCollum, Lee and Pace (2015) show that mortgage curtailment experienced significant increase from 2001 to 2011 and has been a fairly common behavior for U.S. homeowners since 2006. They also show that borrowers with higher credit scores, shorter loan terms, lower leverage at origination and current positive equity are more likely to engage in curtailments.…”

“…Historically, curtailment has been mainly associated with homeowners in Asia and other regions with high saving rates. However, it has become a common behavior among American homeowners in the last decade (McCollum, Lee and Pace 2015). 1 The studies on mortgage curtailment behavior are still limited, with most of them focusing on the importance of curtailment ( e.g ., Hayre and Lauterbach 1991, Chinloy 1993, Lin et al .…”

“…This behavior is also consistent with the findings of Gross and Souleles (2002) that households respond to an increase in interest rates by substantially reducing debt levels. Alternatively, the view of voluntary deleveraging contends that mortgage curtailment is a voluntary action that is motivated by borrowers’ desire to reduce their outstanding debt (McCollum, Lee and Pace 2015). If the possibility of households borrowing funds from other sources to curtail mortgages is excluded, curtailments are essentially determined by household disposable income (Adelman, Cross and Shrider 2010).…”

“…Second, the view of interest rate risk emphasizes the role of household savings in mortgage curtailments while the voluntary deleveraging view emphasizes the role of household disposable income. Although mortgage curtailment has gained popularity among American borrowers in recent years (McCollum, Lee and Pace 2015), the United States is essentially a country with a low saving rate compared to China 5 . In countries and regions with low saving rates, we expect the view of voluntary deleveraging to dominate, whereas in countries and regions with high saving rates, we expect the view of interest rate risk to dominate.…”

“…1.1.Using mortgage data in 20 metropolitan statistical areas from 2001 to 2011, McCollum, Lee and Pace (2015) find that the curtailment rate has dramatically increased over the sample period. Specifically, the curtailment rate was only 0.23% in 2004, and reached 6.63% in 2006.…”