Question

What are the two theories of mortgage default? What are the most important factors that influence the likelihood of default?

Answer 1

Non payments of three or more installments come under the category of default and process of foreclosure is initiated by the concerned financial institutions. Following are theories:

• Involuntary default: Such default is caused by the financial distress. Borrower defaults because of his financial crisis.
• Voluntary default: Such default is done by the borrower deliberately. Sometimes value of home is less than the liability of loan. Thus, borrower deliberately defaults on payments and continue to reside in home until process of foreclosure is materialised.

Following are most important factors that influence the likelihood of default:

• Lose of jobs opportunities.
• Fall in value of home or purchased properties.
• Delay in process of foreclosure.