Mortgage Debt Overhang: Reduced Investment by Homeowners at Risk of Default, Journal of Finance

Abstract

Homeowners at risk of default face a debt overhang that reduces their incentive to invest in their property: in expectation, some value created by investments in the property will go to the lender. I show that this agency conflict affects housing investments. Homeowners at risk of default cut back substantially on home improvements and mortgage principal payments, even when they appear financially unconstrained. Meanwhile, they do not reduce spending on assets that they may retain in default, including home appliances, furniture and vehicles. These findings highlight an important financial friction that has stifled housing investment since the Great Recession.

Type

Article

Author(s)

Brian Melzer

Date Published

2017

Citations

Melzer, Brian. 2017. Mortgage Debt Overhang: Reduced Investment by Homeowners at Risk of Default. Journal of Finance. 72(2): 575-612.

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