Federal Dposit InsuranceCorporation• Center for Financial Researchh
Sanjiv R. Das
Darrell Duffie
Nikunj Kapadia
Risk-Based Capital Standards,
Deposit Insurance and Procyclicality
Risk-Based Capital Standards,
Deposit Insurance and Procyclicality
FDIC Center for Financial Research
Working Paper
No. 2010-03
Your House or Your Credit Card, Which Would You Choose?
Personal Delinquincy Tradeoffs and Precautionary Liquidity Motives
May 2010
Empirical Comparisons and Implied Recovery Rates
kkk
An Empirical
An Empirical Analysis
State-
Efraim Benmel Efraim Benmelech May, 2005
June 20
May , 2005 Asset S2005-14
September 2005
Sanjiv R. Das
Darrell Duffie
Nikunj Kapadia
Risk-Based Capital Standards,
Deposit Insurance and Procyclicality
Risk-Based Capital Standards,
Deposit Insurance and Procyclicality
FDIC Center for Financial Research
Working Paper
No. 2010-03
Your House or Your Credit Card, Which Would You Choose?
Personal Delinquincy Tradeoffs and Precautionary Liquidity Motives
May 2010
Empirical Comparisons and Implied Recovery Rates
kkk
An Empirical
An Empirical Analysis
State-
Efraim Benmel Efraim Benmelech May, 2005
June 20
May , 2005 Asset S2005-14
September 2005
Your House or Your Credit Card, Which Would You Choose?
Personal Delinquency Tradeoffs and Precautionary Liquidity Motives
Ethan Cohen-Cole∗
University of Maryland - College Park
Jonathan Morse
Federal Reserve Bank of Boston
January 28, 2010
Abstract
This paper presents evidence that precautionary liquidity concerns lead many individuals to pay
credit card bills even at the cost of mortgage delinquencies and foreclosures. While the popular press
and some recent literature have suggested that this choice may emerge from steep declines in housing
prices, we find evidence that individual-level liquidity concerns are more important in this decision. That
is, choosing credit cards over housing suggests a precautionary liquidity preference.
By linking the mortgage delinquency decisions to individual-level credit conditions, we are able to
assess the compound impact of reductions in housing prices and retrenchment in the credit markets.
Indeed, we find the availability of cash-equivalent credit to be a key component of the delinquency
decision. We find that a one standard deviation reduction in available credit elicits a change in the
predicted probability of mortgage delinquency that is similar in both direction and nearly double in
magnitude to a one standard deviation reduction in housing price changes (the values are -25% and -
13% respectively). Our findings are consistent with consumer finance literature that finds individuals
have a preference for preserving liquidity - even at significant cost.
∗Ethan Cohen-Cole: Robert H Smith School of Business. 4420 Van Munching Hall, University of Maryland, College Park,
MD 20742. email: ecohencole@rhsmith.umd.edu. (301) 541-7227. Jonathan Morse: 600 Atlantic Avenue, Boston MA. email:
jonathan.morse@bos.frb.org. The authors are grateful to Yiorgos Allayannis, George Aragon, Ezra Becker, Zahi Ben-David,
Jonathan Berk, David Dicks, Janice Eberly, Alex Edmans, Mark Flannery, Paolo Fulghieri, Diego Garcia, Adair Morse, Judit
Montoriol-Garriga, David Musto, Adriano Rampini, Anil Shivdasani, Anjan Thakor, Peter Tufano, Haluk Unal, and seminar par-
ticipants at the American Economic Association meetings, the FDIC-JFSR 9th annual research conference, George Washington
University, Fannie Mae and the Jackson Hole Finance Group for helpful comments. Cohen-Cole thanks the FDIC Center for Fi-
nancial Policy and the Robert H Smith School of Business for financial support. The views expressed in this paper are those of the
authors and do not necessarily reflect those of the Federal Reserve Bank of Boston or the Federal Reserve System.
Personal Delinquency Tradeoffs and Precautionary Liquidity Motives
Ethan Cohen-Cole∗
University of Maryland - College Park
Jonathan Morse
Federal Reserve Bank of Boston
January 28, 2010
Abstract
This paper presents evidence that precautionary liquidity concerns lead many individuals to pay
credit card bills even at the cost of mortgage delinquencies and foreclosures. While the popular press
and some recent literature have suggested that this choice may emerge from steep declines in housing
prices, we find evidence that individual-level liquidity concerns are more important in this decision. That
is, choosing credit cards over housing suggests a precautionary liquidity preference.
By linking the mortgage delinquency decisions to individual-level credit conditions, we are able to
assess the compound impact of reductions in housing prices and retrenchment in the credit markets.
Indeed, we find the availability of cash-equivalent credit to be a key component of the delinquency
decision. We find that a one standard deviation reduction in available credit elicits a change in the
predicted probability of mortgage delinquency that is similar in both direction and nearly double in
magnitude to a one standard deviation reduction in housing price changes (the values are -25% and -
13% respectively). Our findings are consistent with consumer finance literature that finds individuals
have a preference for preserving liquidity - even at significant cost.
∗Ethan Cohen-Cole: Robert H Smith School of Business. 4420 Van Munching Hall, University of Maryland, College Park,
MD 20742. email: ecohencole@rhsmith.umd.edu. (301) 541-7227. Jonathan Morse: 600 Atlantic Avenue, Boston MA. email:
jonathan.morse@bos.frb.org. The authors are grateful to Yiorgos Allayannis, George Aragon, Ezra Becker, Zahi Ben-David,
Jonathan Berk, David Dicks, Janice Eberly, Alex Edmans, Mark Flannery, Paolo Fulghieri, Diego Garcia, Adair Morse, Judit
Montoriol-Garriga, David Musto, Adriano Rampini, Anil Shivdasani, Anjan Thakor, Peter Tufano, Haluk Unal, and seminar par-
ticipants at the American Economic Association meetings, the FDIC-JFSR 9th annual research conference, George Washington
University, Fannie Mae and the Jackson Hole Finance Group for helpful comments. Cohen-Cole thanks the FDIC Center for Fi-
nancial Policy and the Robert H Smith School of Business for financial support. The views expressed in this paper are those of the
authors and do not necessarily reflect those of the Federal Reserve Bank of Boston or the Federal Reserve System.