Mortgage Contract Decisions and Mortgage Distress: Family and Financial Life-Cycle Factors

Published: 2010


The U.S. economy experienced a dramatic rise in the price of owner occupied housing during 1999-2007, and then a precipitous decline from 2007 through 2009. In this paper we utilize data from the Panel Study of Income Dynamics (PSID) during 1999-2009 to study first the factors and borrowing decisions which were related to the run-up and then to see how these diverse positions in owner-occupied housing related to the subsequent difficulties and mortgage distress as of 2009. Our research shows that much of the rise and subsequent difficulties were concentrated among younger and less educated homeowners, and that the difficulties were also concentrated in selected real estate markets where home owners were allocating a substantial share of their income to debt service and other home related outlays such as taxes, utilities, and insurance. This pattern of high costs to support a housing position is interpreted as the result of a speculative price run-up supported by the joint decisions of the homeowners and their lenders. In this process the older population took on more mortgage debt than in prior years and may now have less capacity to support help to other adult family members living outside the home.

Key Findings

    • Housing cash flow burden as of 2007 is a strong predictor of subsequent mortgage distress.
    • Aggressive refinancing of homes was greatest in selected urban markets.
    • Many of the problem mortgages were adjustable rate and second mortgages, common in these markets.
    • Mortgage holding of those 65 and older rose from 20 percent in the early 1990s to 30 percent in 2007.
    • All life-cycle groups have experienced adverse outcomes, less so for those over 65.
    • Mortgage difficulties are predictors of reduced overall life satisfaction.