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The Good, The Bad and The Impaired - A Credit Risk Model of the Irish Mortgage Market

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  • Kelly, Robert

    (Central Bank of Ireland)

Abstract

Using a uniquely constructed loan-level dataset of the residential mortgage book of Irish financial institutions, this paper provides a framework for estimating default probabilities of individual mortgages. In particular, the paper examines the progression of mortgages in arrears from 90 days to 360 days. This question is of major financial stability concern in an Irish context as the uncertainty concerning the quality of the loan books of the Irish financial institutions is due, in the main, to the perceived impaired nature of the residential mortgage book. Using this approach, default probabilities are shown to be “hump shaped” when conditioned on loan vintage, with loans originating between 2004 and 2006 are most likely to default.

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Bibliographic Info

Paper provided by Central Bank of Ireland in its series Research Technical Papers with number 13/RT/11.

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Date of creation: Nov 2011
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Handle: RePEc:cbi:wpaper:13/rt/11

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Keywords: Probability of Default; Mortgages; Irish Banking System;

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References

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  1. Jafry, Yusuf & Schuermann, Til, 2004. "Measurement, estimation and comparison of credit migration matrices," Journal of Banking & Finance, Elsevier, vol. 28(11), pages 2603-2639, November.
  2. Lando, David & Skodeberg, Torben M., 2002. "Analyzing rating transitions and rating drift with continuous observations," Journal of Banking & Finance, Elsevier, vol. 26(2-3), pages 423-444, March.
  3. Betancourt, Luis, 1999. " Using Markov Chains to Estimate Losses from a Portfolio of Mortgages," Review of Quantitative Finance and Accounting, Springer, vol. 12(3), pages 303-17, May.
  4. Aron, Janine & Muellbauer, John, 2010. "Modelling and Forecasting UK Mortgage Arrears and Possessions," CEPR Discussion Papers 7986, C.E.P.R. Discussion Papers.
  5. Patrick Bajari & Chenghuan Sean Chu & Minjung Park, 2008. "An Empirical Model of Subprime Mortgage Default From 2000 to 2007," NBER Working Papers 14625, National Bureau of Economic Research, Inc.
  6. Kau, James B, et al, 1992. "A Generalized Valuation Model for Fixed-Rate Residential Mortgages," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 24(3), pages 279-99, August.
  7. Yvonne McCarthy & Kieran McQuinn, 2011. "How Are Irish Households Coping with their Mortgage Repayments? Information from the Survey on Income and Living Conditions," The Economic and Social Review, Economic and Social Studies, vol. 42(1), pages 71-94.
  8. R. M. Cyert & H. J. Davidson & G. L. Thompson, 1962. "Estimation of the Allowance for Doubtful Accounts by Markov Chains," Management Science, INFORMS, vol. 8(3), pages 287-303, April.
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Citations

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Cited by:
  1. Lydon, Reamonn, 2013. "Do households with debt problems spend less?," Economic Letters 02/EL/13, Central Bank of Ireland.
  2. McGuinness, Anne, 2011. "The Distribution of Property Level Mortgage Arrears," Economic Letters 06/EL/11, Central Bank of Ireland.
  3. Lawless, Martina & McCann, Fergal, 2012. "Determinants of default: Evidence from a sector-level panel of Irish SME loans," Research Technical Papers 03/RT/12, Central Bank of Ireland.
  4. Kelly, Robert & McQuinn, Kieran, 2013. "On the hook for impaired bank lending: Do sovereign-bank inter-linkages affect the fiscal multiplier?," Research Technical Papers 01/RT/13, Central Bank of Ireland.
  5. Rory McElligott & Martin O'Brien, 2014. "The evolution of loan level data in Ireland," IFC Bulletins chapters, in: Bank for International Settlements (ed.), Proceedings of the Porto Workshop on "Integrated management of micro-databases", volume 37, pages 18-23 Bank for International Settlements.
  6. 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.
  7. Thorvardur Tjörvi Ólafsson & Karen Á. Vignisdóttir, 2012. "Households’ position in the financial crisis in Iceland. Analysis based on a nationwide household-level database," Economics wp59, Department of Economics, Central bank of Iceland.
  8. McCann, Fergal & McIndoe-Calder, Tara, 2012. "Determinants of SME Loan Default: The Importance of Borrower-Level Heterogeneity," Research Technical Papers 06/RT/12, Central Bank of Ireland.

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