Adversity or Strategy? the Effect of Credit Constraint and Expectation on Mortgage Default and Personal Bankruptcy Decisions. (Paperback)

This thesis contributes to the literature on mortgage default and personal bankruptcy with empirical findings, which disentangle the two mainstream theories: the willingness-to-pay theory and the ability-to-pay theory. The emphasis is on credit constraints and insolvency in order to integrate these two theories. The estimation results of a model of simultaneous choices between mortgage and nonmortgage delinquency suggest that credit constraints and borrowers' insolvency are the bridge between the two conflicting theories. I also find the importance of backward-looking expectations and the homestead exemption in households' decisions on mortgage default and bankruptcy. In addition, with a model of bankruptcy decisions, I show that credit constrained and seriously financially distressed households act more "ruthlessly" based on their financial benefit from bankruptcy filings.