Why do Borrowers Default on Mortgages?*.

This article investigates the primary causes of mortgage default by comparing three prevailing theories: strategic default (triggered solely by negative equity), cash flow default (triggered solely by negative life events), and double-trigger default (requiring both negative equity and negative life events). Using a novel linked data set from JPMorgan Chase that combines mortgage-servicing records with bank account income data for 3.2 million borrowers, the study finds that only about 6% of underwater defaults are exclusively strategic, while 70% are driven solely by negative life events and 24% by the interaction of both triggers. The authors address measurement error in life events by using above-water defaulters—who cannot default due to negative equity—as a comparison group, and they estimate the causal effect of negative equity using an instrumental variables approach based on regional house price cyclicality. Their findings challenge prior estimates that suggested a much higher prevalence of strategic default and contrast with standard structural models, which they reconcile by incorporating a substantial utility cost of default. The results imply that negative life events play a central role in mortgage default and suggest that policy interventions focusing on temporary payment relief may be more effective and efficient than principal forgiveness in reducing defaults.