IDEAS home Printed from https://ideas.repec.org/a/kap/jrefec/v61y2020i4d10.1007_s11146-019-09711-1.html
   My bibliography  Save this article

Three Triggers? Negative Equity, Income Shocks and Institutions as Determinants of Mortgage Default

Author

Listed:
  • Andrew Linn

    (The Bank of England)

  • Ronan C. Lyons

    (Department of Economics, Trinity College Dublin, Dublin, Ireland; Spatial Economics Research Centre, London School of Economics)

Abstract

In understanding the determinants of mortgage default, the consensus has moved from an ‘option theory’ model to the ‘double trigger’ hypothesis. Nonetheless, that consensus is based on within-country studies of default. This paper examines the determinants of mortgage default across five European countries, using a large dataset of over 2.3 million active mortgage loans originated between 1991 and 2013 across over 150 banks. The analysis finds support for both elements of the double trigger: while negative equity itself is a relatively small contributor to default, the effect of unemployment, and other variables such as the interest rate, is stronger for those in negative equity. The double trigger, however, varies by country: country-specific factors are found to have a large effect on default rates. For any given level of a loan’s Loan to Value (“LTV”) ratio, and as LTV changes, borrowers were more sensitive to the interest rate and unemployment in Ireland and Portugal than in the UK or the Netherlands.

Suggested Citation

  • Andrew Linn & Ronan C. Lyons, 2020. "Three Triggers? Negative Equity, Income Shocks and Institutions as Determinants of Mortgage Default," The Journal of Real Estate Finance and Economics, Springer, vol. 61(4), pages 549-575, November.
    • Handle: RePEc:kap:jrefec:v:61:y:2020:i:4:d:10.1007_s11146-019-09711-1
    DOI: 10.1007/s11146-019-09711-1
    as

    Download full text from publisher

    File URL: http://link.springer.com/10.1007/s11146-019-09711-1
    File Function: Abstract
    Download Restriction: Access to full text is restricted to subscribers.
    File URL: https://libkey.io/10.1007/s11146-019-09711-1?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to look for a different version below or search for a different version of it.

    Other versions of this item:

    References listed on IDEAS

    as
    1. Atif Mian & Amir Sufi & Francesco Trebbi, 2015. "Foreclosures, House Prices, and the Real Economy," Journal of Finance, American Finance Association, vol. 70(6), pages 2587-2634, December.
    2. John Y. Campbell & João F. Cocco, 2015. "A Model of Mortgage Default," Journal of Finance, American Finance Association, vol. 70(4), pages 1495-1554, August.
    3. Kelly, Robert & O'Malley, Terence & O'Toole, Conor, 2015. "Designing Macro-prudential Policy in Mortgage Lending: Do First Time Buyers Default Less?," Research Technical Papers 02/RT/15, Central Bank of Ireland.
    4. Qi, Min & Yang, Xiaolong, 2009. "Loss given default of high loan-to-value residential mortgages," Journal of Banking & Finance, Elsevier, vol. 33(5), pages 788-799, May.
    5. Dr. Petra Gerlach & Seán Lyons, 2015. "Mortgage arrears in Europe: The impact of monetary and macroprudential policies," Working Papers 2015-05, Swiss National Bank.
    6. Kristopher Gerardi & Kyle F. Herkenhoff & Lee E. Ohanian & Paul S. Willen, 2018. "Can’t Pay or Won’t Pay? Unemployment, Negative Equity, and Strategic Default," The Review of Financial Studies, Society for Financial Studies, vol. 31(3), pages 1098-1131.
    7. Yatchew, Adonis & Griliches, Zvi, 1985. "Specification Error in Probit Models," The Review of Economics and Statistics, MIT Press, vol. 67(1), pages 134-139, February.
    8. Gauthier Lanot & David Leece, 2016. "Mortgage Loan Characteristics, Unobserved Heterogeneity and the Performance of United Kingdom Securitized Subprime Loans," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 44(4), pages 771-813, October.
    9. van Damme, E.E.C., 2002. "Economische analyse van politieke processen," Other publications TiSEM 54188f86-501c-4808-b802-1, Tilburg University, School of Economics and Management.
    10. Gordon W. Crawford & Eric Rosenblatt, 1995. "Efficient Mortgage Default Option Exercise: Evidence from Loss Severity," Journal of Real Estate Research, American Real Estate Society, vol. 10(5), pages 543-556.
    11. John Gathergood, 2009. "Income Shocks, Mortgage Repayment Risk and Financial Distress Among UK Households," Discussion Papers 09/03, University of Nottingham, Centre for Finance, Credit and Macroeconomics (CFCM).
    12. Kelly, Robert & McCann, Fergal, 2016. "Some defaults are deeper than others: Understanding long-term mortgage arrears," Journal of Banking & Finance, Elsevier, vol. 72(C), pages 15-27.
    13. Kroot, Jan & Giouvris, Evangelos, 2016. "Dutch mortgages: Impact of the crisis on probability of default," Finance Research Letters, Elsevier, vol. 18(C), pages 205-217.
    14. Foote, Christopher L. & Gerardi, Kristopher & Willen, Paul S., 2008. "Negative equity and foreclosure: Theory and evidence," Journal of Urban Economics, Elsevier, vol. 64(2), pages 234-245, September.
    15. Clemens Bonner & Daniel Streitz & Michael Wedow, 2016. "On the differential impact of securitization on bank lending during the financial crisis," DNB Working Papers 501, Netherlands Central Bank, Research Department.
    16. Shuang Zhu & R. Kelley Pace, 2015. "The Influence of Foreclosure Delays on Borrowers' Default Behavior," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 47(6), pages 1205-1222, September.
    17. Aron, Janine & Muellbauer, John, 2011. "Modelling and forecasting with county court data: regional mortgage possession claims and orders in England and Wales," LSE Research Online Documents on Economics 33580, London School of Economics and Political Science, LSE Library.
    18. Kelly, Robert & O'Malley, Terence, 2014. "A Transitions-Based Model of Default for Irish Mortgages," Research Technical Papers 17/RT/14, Central Bank of Ireland.
    19. Lambrecht, Bart M & Perraudin, William R M & Satchell, Steven, 2003. "Mortgage Default and Possession under Recourse: A Competing Hazards Approach," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 35(3), pages 425-442, June.
    20. Sónia Costa, 2012. "Households’ Default Probability: An Analysis Based on the Results of the HFCS," Economic Bulletin and Financial Stability Report Articles and Banco de Portugal Economic Studies, Banco de Portugal, Economics and Research Department.
    21. Andra C. Ghent & Marianna Kudlyak, 2011. "Recourse and Residential Mortgage Default: Evidence from US States 1," The Review of Financial Studies, Society for Financial Studies, vol. 24(9), pages 3139-3186.
    22. Reamonn Lyndon & Yvonne McCarthy, 2013. "What Lies Beneath? Understanding Recent Trends in Irish Mortgage Arrears," The Economic and Social Review, Economic and Social Studies, vol. 44(1), pages 117-150.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Luong, Thi Mai & Scheule, Harald, 2022. "Benchmarking forecast approaches for mortgage credit risk for forward periods," European Journal of Operational Research, Elsevier, vol. 299(2), pages 750-767.
    2. Michelle Bergmann, 2020. "The Determinants of Mortgage Defaults in Australia – Evidence for the Double-trigger Hypothesis," RBA Research Discussion Papers rdp2020-03, Reserve Bank of Australia.
    3. Kristin Aarland & Anna Maria Santiago, 2023. "Serious Mortgage Arrears among Immigrant Descendant and Native Participants in a Low-Income Public Starter Mortgage Program: Evidence from Norway," Societies, MDPI, vol. 13(5), pages 1-28, May.
    4. Chrysovalantis Gaganis & Panagiota Papadimitri & Fotios Pasiouras & Menelaos Tasiou, 2023. "Social traits and credit card default: a two-stage prediction framework," Annals of Operations Research, Springer, vol. 325(2), pages 1231-1253, June.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Andrew Linn & Ronan C Lyons, 2018. "The Triple Trigger? Negative Equity, Income Shocks and Institutions as Determinants of Mortgage Default," Trinity Economics Papers tep0718, Trinity College Dublin, Department of Economics.
    2. Lazarov, Vladimir & Hinterschweiger, Marc, 2018. "Determinants of distress in the UK owner-occupier and buy-to-let mortgage markets," Bank of England working papers 760, Bank of England.
    3. Kelly, Robert & McCann, Fergal, 2016. "Some defaults are deeper than others: Understanding long-term mortgage arrears," Journal of Banking & Finance, Elsevier, vol. 72(C), pages 15-27.
    4. Asish Saha & Hock-Eam Lim & Goh-Yeok Siew, 2021. "Housing Loan Repayment Behaviour in Malaysia: An Analytical Insight," International Journal of Business and Economics, School of Management Development, Feng Chia University, Taichung, Taiwan, vol. 20(2), pages 141-159, September.
    5. McCann, Fergal, 2014. "Modelling default transitions in the UK mortgage market," Research Technical Papers 18/RT/14, Central Bank of Ireland.
    6. Alin Marius Andries & Anca Copaciu & Radu Popa & Razvan Vlahu, 2021. "Recourse and (strategic) mortgage defaults: Evidence from changes in housing market laws," Working Papers 727, DNB.
    7. Asish Saha & Hock-Eam Lim & Goh-Yeok Siew, 2021. "Housing Loan Repayment Behaviour in Malaysia: An Analytical Insight," International Journal of Business and Economics, School of Management Development, Feng Chia University, Taichung, Taiwan, vol. 20(2), pages 1-19, September.
    8. Mocetti, Sauro & Viviano, Eliana, 2017. "Looking behind mortgage delinquencies," Journal of Banking & Finance, Elsevier, vol. 75(C), pages 53-63.
    9. Kristopher Gerardi & Kyle F. Herkenhoff & Lee E. Ohanian & Paul S. Willen, 2018. "Can’t Pay or Won’t Pay? Unemployment, Negative Equity, and Strategic Default," The Review of Financial Studies, Society for Financial Studies, vol. 31(3), pages 1098-1131.
    10. Aron, Janine & Muellbauer, John, 2016. "“Modelling and forecasting mortgage delinquency and foreclosure in the UK.”," Journal of Urban Economics, Elsevier, vol. 94(C), pages 32-53.
    11. Hung Xuan Do & Daniel Rösch & Harald Scheule, 2020. "Liquidity Constraints, Home Equity and Residential Mortgage Losses," The Journal of Real Estate Finance and Economics, Springer, vol. 61(2), pages 208-246, August.
    12. Arnab Biswas & Hamilton Fout & Anthony Pennington-Cross, 2023. "Mortgage Losses under Alternative Property Disposition Approaches: Deed-in-Lieu, Short Sales, and Foreclosure Sales," The Journal of Real Estate Finance and Economics, Springer, vol. 66(3), pages 603-635, April.
    13. Pavan, Marina & Barreda-Tarrazona, Iván, 2020. "Should I default on my mortgage even if I can pay? Experimental evidence," Journal of Economic Dynamics and Control, Elsevier, vol. 110(C).
    14. Therese C. Scharlemann & Stephen H. Shore, 2022. "The effect of changing mortgage payments on default and prepayment: Evidence from HAMP resets," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 50(5), pages 1231-1256, September.
    15. Xudong An & Lawrence R. Cordell, 2017. "Regime Shift And The Post-Crisis World Of Mortgage Loss Severities," Working Papers 17-8, Federal Reserve Bank of Philadelphia.
    16. John Y. Campbell, 2013. "Mortgage Market Design," Review of Finance, European Finance Association, vol. 17(1), pages 1-33.
    17. Janine Aron & John Muellbauer, 2010. "Modelling and Forecasting UK Mortgage Arrears and Possessions," Economics Series Working Papers 499, University of Oxford, Department of Economics.
    18. Stuart Gabriel & Matteo Iacoviello & Chandler Lutz, 2021. "A Crisis of Missed Opportunities? Foreclosure Costs and Mortgage Modification During the Great Recession [Synthetic control methods for comparative case studies: Estimating the effect of California," The Review of Financial Studies, Society for Financial Studies, vol. 34(2), pages 864-906.
    19. Steven Laufer, 2018. "Equity Extraction and Mortgage Default," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 28, pages 1-33, April.
    20. Adam M Guren & Timothy J McQuade, 2020. "How Do Foreclosures Exacerbate Housing Downturns?," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 87(3), pages 1331-1364.

    More about this item

    Keywords

    Mortgage default; Negative equity; Double trigger; European Union;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • R31 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Real Estate Markets, Spatial Production Analysis, and Firm Location - - - Housing Supply and Markets

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:kap:jrefec:v:61:y:2020:i:4:d:10.1007_s11146-019-09711-1. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Sonal Shukla or Springer Nature Abstracting and Indexing (email available below). General contact details of provider: http://www.springer.com .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.