Jurnal of Finance - Mortgage Debt Overhang: Reduced Investment by Homeowners at Risk of Default (BRIAN T. MELZER)
ABSTRACT
Homeowners at risk of default face a debt overhang
that reduces their incentive to invest in their property: in expectation, some
value created by investments in the property will go to the lender. This agency
conflict affects housing investments. Homeowners at risk of default cut back
substantially on home improvements and mortgage principal payments, even when
they appear financially unconstrained. Meanwhile, they do not reduce spending
on assets that they may retain in default, including home appliances,
furniture, and vehicles. These findings highlight an important financial
friction that has stifled housing investment since the Great Recession.
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