Borrower expectations and mortgage performance: Evidence from the COVID-19 pandemic

Abstract

We estimate the causal effects of changing borrower expectations on the execution of options embedded in mortgage contracts during the COVID-19 pandemic. Borrowers who were most optimistic about future appreciation at the onset of the pandemic quickly entered forbearance, but then exited as expectations improved. However, borrowers who expected unemployment entered and remained in forbearance throughout the weak labor market. We also find expectations are determined via both local experiences and social networks, and correlate with both leverage and debt burdens. Overall, these findings highlight an important source of private information and adverse selection in the mortgage market.