Trading Equity for Liquidity:
Bank Data on the Relationship Between Liquidity and Mortgage Default
For many families, homeownership is a vital part of the American dream. Often, their mortgage will be their greatest debt and their mortgage payment will be their largest recurring monthly expense. This report aims to answer important questions about the role of liquidity, equity, income levels, and payment burden as determinants of mortgage default using a unique data set of de-identified JPMorgan Chase customers with a Chase mortgage and Chase deposit accounts. Our analysis suggests that liquidity may have been a more important predictor of mortgage default than equity, income level, or payment burden. Trading equity for liquidity at origination by making a slightly smaller down payment and holding the residual cash in an “emergency mortgage reserve” account may lead to lower default rates. A pilot program could test the impact on default rates of this trade-off and, if impactful and cost-effective, the program could serve as an alternative to underwriting standards based on meeting a total debt-to-income (DTI) threshold at origination.