Loan repayment behavior and the riskiness of borrowers have received much attention in recent years. Option theory predicts that borrowers should immediately exercise the default option when the market value of their mortgage exceeds the value of the underlying property. However, empirical evidence shows that a substantial number of borrowers are unlikely to default as ‘ruthlessly’ as option theory predicts. This indicates that mortgage borrowers are a heterogeneous group. We hypothesize that borrower’s time preferences across mortgage choices are heterogeneous, and study whether heterogeneity in borrowers’ time preferences correlates with their decision to default on their mortgage payments. Borrowers with a present-biased preference are more likely to accept back-loaded mortgages that minimize up-front costs, even though this increases their risk of going “underwater” and entering default when negative home price shocks occur. 

 

The speaker of the seminar, HE Jia, is an assistant professor in Finance at Nankai University. She obtained her Ph.D. from National University of Singapore in 2014. Her research mainly focuses on real estate finance and behavioral economics. Some of her recent research topics are: non-optimal and apparently irrational default behavior of borrowers, mortgage partial prepayment and borrower’s reinforcement learning behavior, default of Chinese listed companies, superstition and asset market, personal bankruptcy, etc. Dr He also conducts research on other topics such as behavior of real estate developer, housing construction quality, and consumer consumption behavior.