This paper examines the relationship between negative equity and financial liquidity on mortgage default. The relationship is grounded in the view that negative equity de-motivates the borrower to hold on to the mortgage as it is valued as a foregone investment and illiquidity shocks hamper the ability of the borrower to make the mortgage payments. Just like previous literature we analyze option theory to model for negative equity default. However, we also state the limitations of the model and incorporate liquidity measures to explain default. The study provides equal emphasis of both components being sufficient conditions of determining the likelihood of mortgage default. The hypothesis is tested using the data set sourced from the New York City Housing and Vacancy Survey. The technique used in the analysis is the Ordinary least Squares and it gives us significant results for equity and liquidity as contributors to risk of default.
Paracha, Mohammad, "An Analysis of the Impact of Negative Equity and Liquidity on the Likelihood of Mortgage Default" (2011). Senior Independent Study Theses. Paper 757.
Bachelor of Arts
Senior Independent Study Thesis
© Copyright 2011 Mohammad Paracha