A homeowner's station in life and personal spending beliefs and habits are important indicators of the borrower's potential for home-mortgage default.
"Our research has shown that a borrower's personal traits and behaviors have considerable influence on their willingness and ability to repay a mortgage loan and avoid foreclosure," says Stephanie Rauterkus, Ph.D., assistant professor of finance in the University of Alabama at Birmingham (UAB) School of Business.
"Traditionally, the building finance industry has focused on default pressures like income, credit scores or loan-to-home-value ratios, but our research has shown that borrowers who may look identical by these traditional measures could have very different default probabilities based on their
behavioral characteristics," she says.
The study,
Behavioral Determinants of Mortgage Default, was authored by Rauterkus, her husband Andreas Rauterkus, Ph.D., UAB assistant professor of finance, and Grant Thrall, Ph.D., professor of geography at the University of Florida.
Best Practices for Mortgages "The research revealed that
affluent, well-educated and older borrowers 55 years and up were significantly less likely to experience a mortgage default," says Stephanie Rauterkus. "Further, those borrowers who are less likely to default live in
newer, well-developed suburbs or in
city high-rise dwellings or town homes."
High Risk Mortgages
Conversely,
married borrowers in their 30s with multiple children who earn more modest incomes, a range between
$40,000 and $80,000, and live in
older, more established neighborhoods located
near city centers are more likely to default, the researchers say.
Broken down by LifeMode classification,
Less Likely to Default on Mortgages
Homeowners in the groups High Society, Upscale Avenues, Senior Styles, Solo Acts, Scholars and Patriots and American Quilt were less likely to default.
More Likely to Default on Mortgages
Homeowners in the Metropolis, Family Portrait, High Hopes, Global Roots, Factory and Farm and Traditional Living groups were more likely to default on their mortgages.
In a deeper analysis of the data, the team found cases in which extremely divergent default levels were reported between similar lifestyle groups. In one example, two groups with complementary income levels and other similarities in traditional default-pressure categories experienced dramatically different default patterns.
Lifestyle Choices and Attitudes Affect Mortgage Failure"This tells us that lifestyle is a more important determinant in the calculation of the probability of mortgage failure than is income," Andreas Rauterkus says. "Someone may have the income the pay off their mortgage, but if other lifestyle attitudes or views are considered, a borrower simply may choose to stop paying the mortgage in certain circumstances."
Neighborhoods Affect Mortgage Failure and Success"Neighborhoods matter," Stephanie Rauterkus says. "Neighborhoods typically are made up of residents in similar life stages with similar lifestyle outlooks that make certain neighborhoods more susceptible to default trends than others.
"This idea is vitally important to lenders, policymakers and other entities involved in efforts to prevent further erosion in the housing market because it offers new insights into how and where rescue funds, counseling services and other relief mechanisms should be deployed and allocated," she says.
About the UAB School of Business
Known for its innovative and interdisciplinary approach to education at both the graduate and undergraduate levels, the University of Alabama at Birmingham (UAB) is an internationally renowned research university and academic medical center. Capitalizing on the campus' location in the heart of Alabama's largest city and business center, the UAB School of Business offers unparalleled student access to internships as well as part- and full-time employment opportunities with the state's most significant companies.
EDITOR'S NOTE: The University of Alabama at Birmingham (UAB) is a separate, independent institution from the University of Alabama, which is located in Tuscaloosa.