Trading Equity for Liquidity: Bank Data on the Relationship Between Liquidity and Mortgage Default
This report analyzes mortgage default using information taken from the JPMorgan Chase Institute housing finance research to evaluate the relationship between liquidity, equity, income level, and payment burden and default. Across all four groups, the report finds that liquidity may be more predictive for determining the likelihood of mortgage default particularly among borrowers with little post-closing liquidity and little liquidity but high equity. Overall, the report determines that alternative underwriting standards incorporating a minimum amount of post-closing liquidity may be a more effective way to prevent mortgage default compared to using DTI thresholds at origination.
Diana Farrell, Kanav Bhagat, and Chen Zhao
JPMorgan Chase & Co. (June 2019)