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The Impact of Repossession Risk on Mortgage Default

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  • O'Malley, Terry

    (Central Bank of Ireland)

Abstract

This paper studies the effect of removing repossession risk on a borrower’s decision to default on their mortgage. I exploit quasi-experimental variation in home-repossession law generated by a legal ruling in Ireland, which retroactively removed repossession risk on properties mortgaged before a certain date. Using matched data, sampled locally around this cut-off date, and a difference-in-differences research design, I find that the removal of credible repossession risk led to an immediate increase in mortgage default of 0.5 percentage points a quarter. Consistent with economic models of mortgage default, I find that the effect is driven by borrowers with low and negative home equity, but also by those with lower incomes and higher interest rates.

Suggested Citation

  • O'Malley, Terry, 2018. "The Impact of Repossession Risk on Mortgage Default," Research Technical Papers 1/RT/18, Central Bank of Ireland.
    • Handle: RePEc:cbi:wpaper:1/rt/18
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    File URL: https://www.centralbank.ie/docs/default-source/publications/research-technical-papers/1rt18-the-impact-of-repossession-risk-on-mortgage-default-(o'malley).pdf?sfvrsn=8
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    Cited by:

    1. 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.

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