In the earlier version, we found that Loan-to-Value at origination predicted default probability, even after controlling for market-to-market (i.e., contemporaneous) LTV. We now find that the results are robust to whether we look at LTV at origination, dollar amount of the down-payment, or down-payment relative to income. This is consistent with prospect theory--borrowers show aversion to [realizing the loss] on their down-payments, even when walking away seems to make sense financially.
The paper is on SSRN.
[Thanks to Tstockmann for more correct wording on prospect theory].
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