The authors, Campbell and Cocco, develop a microeconomic model of this important behavior and come up with some interesting results.
In particular, they make a clean connection between negative equity and borrowing constraints when it comes to default. Negative equity increases the default risk, of course, but the degree of negative equity that triggers a default depends on the degree to which the household is constrained in the credit markets. pofoundly constrained households can default at low levels of negative equity.
The other interesting result is the breakdown of the particular risks of the various types of home financing. For example, interest-only mortgages have the highest risk of default waves. Even so, there are ranges of risk events for which they have some clear advantages over other forms of financing. For one, these borrowers are less likely to face borrowing constraints than other types of borrowers. This benefit is generally overwhelmed by the equity risk they face -- interest-only homes are the most exposed to decreases in home value.
The paper is pretty deep and will take several readings to get a handle on the arguments. But the idea of approaching the question with a dynamic micro-model is significant.
