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Journal of Financial and Quantitative Analysis Vol. 61 No. 2 2026

Default Costs and Repayment of Underwater Mortgages

Jan K. Brueckner1; James Conklin2; N. Edward Coulson3; Moussa Diop4

1 UC Irvine Department of Economics · 2 University of Georgia Terry College of Business · 3 UC Irvine Paul Merage School of Business · 4 University of Southern California Sol Price School of Public Policy

open access

Abstract

We explore an overlooked phenomenon in mortgage markets: repayment of underwater mortgages. Using a sample of mortgages terminated between 2007 and 2016, we show that such repayment indeed occurs, and that it is affected by the same factors commonly used in studies of default: the magnitude of home equity and the borrower’s credit score, which captures default cost as well as liquidity. A novel insight is that underwater repayers, unlike most defaulters, are not liquidity constrained, providing a much cleaner environment to study default costs. We estimate lower bounds on these costs. Our results indicate that default costs are substantial.

DOI
10.1017/s0022109025101774
Volume
61
Issue
2
Pages
1011-1035
Language
en
Sources
openalex crossref

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