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The Impact of Repossession Risk on Mortgage Default

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  • TERRY O'MALLEY

Abstract

I study the effect of removing repossession risk on a mortgagor's decision to default. Reducing default costs may result in strategic default, particularly during crises when homeowners can be substantially underwater. I analyze difference‐in‐differences variation in repossession risk generated by an unexpected legal ruling in Ireland that prohibited collateral enforcement on delinquent residential mortgages originated before a particular date. I estimate that borrowers defaulted by 0.3 percentage points more each quarter after the ruling, a relative increase of approximately one‐half. High loan‐to‐value ratios and low liquidity are associated with a larger treatment effect, suggesting both equity and consumption‐based motivations.

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  • Terry O'Malley, 2021. "The Impact of Repossession Risk on Mortgage Default," Journal of Finance, American Finance Association, vol. 76(2), pages 623-650, April.
    • Handle: RePEc:bla:jfinan:v:76:y:2021:i:2:p:623-650
    DOI: 10.1111/jofi.12990
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