Resumen de Liquidity problems and early payment default among subprime mortgages

Nathan B. Anderson, Jane K. Dokko

• We compare the twelve-month default probability among subprime borrowers differing only in the number of months before their first lump-sum property tax payment, after which time they may be exposed to reduced liquidity. We showthat borrowers with an earlier property tax bill-- within three months of origination--have 2% to 6% higher first-year default rates than borrowers facing their first property tax bill ten to twelve months after origination. Lump-sum property tax payments appear to produce a persistent state of low liquidity, the length of which raises the likelihood of default. These results are about one-third the effect size of a transition from 10% positive to 20% negative equity found in the literature. This paper provides causal evidence that liquidity constraints are important predictors of mortgage default. [ABSTRACT FROM AUTHOR]