The Determinants of Household Debt Default

Rodrigo Alfaro; Natalia Gallardo

doi:10.4067/S0718-88702012000100003

Authors

Rodrigo Alfaro BBVA Research
Natalia Gallardo MIT Sloan School of Management

DOI:

https://doi.org/10.4067/S0718-88702012000100003

Keywords:

Credit risk, mortgage default

Abstract

In this paper, we study household debt default behavior in Chile using survey data. Previous research in this area suggests financial and personal variables help estimate individual and group probabilities of default. We study mortgage and consumer default separately, as the default decisions and overall borrower behavior are different for each type of debt. Our study finds that income and income-related variables are the only significant and robust variables that explain default for both types of debt. Demographic or personal variables are affected by only one type of debt but not more. For example, the level of education is a factor that affects mortgage default, whereas the determinants of consumer debt default include the age of the household head, and the number of people within the household that contribute to the total family income. We find that the probability of default decreases as the family income increases, and that our estimations are consistent with other studies similar to ours.

Downloads

Download data is not yet available.

References

Andrade, F., & Thomas, L. (2007). Structural models in consumer credit. European Journal of Operational Research, 183(3), 1569–1581. https://doi.org/10.1016/j.ejor.2006.07.049

Angrist, J. (2001). Estimation of limited dependent variable models with dummy endogenous regressors: Simple strategies for empirical practice. Journal of Business & Economic Statistics, 19(1), 2–16. https://doi.org/10.1198/07350010152472571

Avery, R., Calem, P., & Canner, G. (2004). Consumer credit scoring: Do situational circumstances matter? Journal of Banking and Finance, 28(4), 835–856.

Barceló, C. (2006). Imputation of the 2002 wave of the Spanish Survey of Household Finances (EFF) [Working paper]. Central Bank of Spain.

Campbell, J. (2006). Household finance. The Journal of Finance, 61(4), 1553–1604. https://doi.org/10.1111/j.1540-6261.2006.00883.x

Campbell, J., & Cocco, J. (2010). A model of mortgage default [Working paper]. Harvard University.

Campbell, S., & Dietrich, J. (1984). The determinants of default on insured conventional residential mortgage loans. The Journal of Finance, 38(5), 1569–1581. https://doi.org/10.2307/2327587

Canner, B., Gabriel, S., & Woolley, J. (1991). Race, default risk and mortgage lending: A study of the FHA and conventional loan markets. Southern Economic Journal, 58(1), 249–262. https://doi.org/10.2307/1060046

Deng, Y., Quigley, J., & Order, R. (1995). Mortgage default and low downpayment loans: The cost of public subsidy [Working paper]. National Bureau of Economic Research.

Devaney, S., & Lytton, R. (1995). Household insolvency: A review of household debt repayment, delinquency, and bankruptcy. Financial Services Review, 4(2), 137–156. https://doi.org/10.1016/1057-0810(95)90008-x

Fuenzalida, M., & Ruiz-Tagle, J. (2009). Riesgo financiero de los hogares [Financial risk of households]. The Chilean Economy, 12(2), 35–53.

Heckman, J. (1979). Sample selection bias as a specification error. Econometrica, 47(1), 153–162. https://doi.org/10.2307/1912352

Ingram, F., & Frazier, E. (1982). Alternative multivariate tests in limited dependent variable models: An empirical assessment. Journal of Financial and Quantitative Analysis, 17(2), 227–240. https://doi.org/10.2307/2330848

Jackson, F. R., & Kasserman, D. L. (1980). Default risk on home mortgage loans: A test of competing hypotheses. Journal of Risk and Insurance, 47(4), 678–690. https://doi.org/10.2307/252290

Kennickell, A. (2008). The role of over-sampling of the wealthy in the Survey of Consumer Finances. Irving Fisher Committee Bulletin, 28, 403–408.

Lawrence, C., & Arshadi, N. (1995). A multinomial logit analysis of problem loan resolution choices in banking. Journal of Money, Credit and Banking, 27(1), 202–216.

Lawrence, E., & Smith, L. (1992). An analysis of default risk in mobile home credit. Journal of Banking and Finance, 16(2), 299–312. https://doi.org/10.1016/0378-4266(92)90016-s

Madeira, C. (2011). Computing population weights for the EFH survey (Working Paper 632). Central Bank of Chile.

Mills, E., & Lubuele, L. (1994). Performance of residential mortgages in low and moderate-income neighborhoods. Journal of Real Estate Finance and Economics, 9(3), 245–260. https://doi.org/10.1007/bf01099277

Morales, L., & Yáñez, A. (2006). La bancarización en Chile, concepto y medición [Banking penetration in Chile: Concept and measurement] [Working paper]. Superintendency of Banks and Financial Institutions of Chile.

Morton, G. (1975). A discriminant function analysis of residential mortgage delinquency and foreclosure. AREUEA Journal, 3, 73–90.

Pham, T., & Lensink, R. (2008). Household borrowing in Vietnam: A comparative study of default risk of informal, formal and semi-formal credit. Journal of Emerging Market Finance, 7(3), 237–261. https://doi.org/10.1177/097265270800700302

Sharma, M., & Zeller, M. (1997). Repayment performance in group-based credit programs in Bangladesh: An empirical analysis. World Development, 25(10), 1731–1742. https://doi.org/10.1016/s0305-750x(97)00063-6

Stansell, S., & Millar, J. (1976). An empirical study of mortgage payment to income ratios in a variable rate mortgage program. The Journal of Finance, 31(2), 415–425. https://doi.org/10.2307/2326611

Vandell, K. (1978). Default risk under alternative mortgage instruments. The Journal of Finance, 33(5), 1279–1296. https://doi.org/10.2307/2327266

Vandell, K., & Thibodeau, T. (1985). Estimation of mortgage defaults using disaggregate loan history data. AREUEA Journal, 15(3), 292–317.

Vella, F. (1998). Estimating models with sample selection bias: A survey. The Journal of Human Resources, 33(1), 127–169. https://doi.org/10.2307/146317

Waller, G. (1988). Residential mortgage default: A clarifying analysis. Housing Finance Review, 7, 321–333.

Webb, B. (1982). Borrower risk under alternative mortgage instruments. The Journal of Finance, 37(1), 169–183. https://doi.org/10.2307/2327124