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Income Volatility and Residential Mortgage Delinquency: Evidence from 12 EU Countries

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  • Diaz-Serrano, Luis

    ()
    (Universitat Rovira i Virgili)

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    Abstract

    We investigate the socio-economic determinants of mortgage delinquency in 12 EU countries and observe that income volatility significantly increases the mortgage delinquency risk. This pattern even holds for borrowers with higher-income profiles if volatility in income is high enough. From this result we can draw the following conclusions: i) mortgage protection insurance policies might be failing to cover those borrowers most in need; ii) the existence of credit market imperfections, and; iii) the inability for a number of borrowers most at income risk to accumulate precautionary savings in order to meet mortgage payments when shocks in income arise.

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    File URL: http://ftp.iza.org/dp1396.pdf
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    Bibliographic Info

    Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 1396.

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    Length: 42 pages
    Date of creation: Nov 2004
    Date of revision:
    Publication status: published as 'Income volatility and residential mortgage delinquency across the EU' in: Journal of Housing Economics, 2005, 14 (3), 153-177
    Handle: RePEc:iza:izadps:dp1396

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    Related research

    Keywords: homeownership; credit market imperfections; mortgage insurance; income volatility; precautionary savings; payment-to-income ratio; mortgage delinquency;

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    References

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    1. Hartog, Joop & Vijverberg, Wim P., 2002. "Do Wages Really Compensate for Risk Aversion and Skewness Affection?," IZA Discussion Papers 426, Institute for the Study of Labor (IZA).
    2. Gwilym Pryce & Margaret Keoghan, 2002. "Unemployment insurance for mortgage borrowers: is it viable and does it cover those most in need?," European Journal of Housing Policy, Taylor and Francis Journals, vol. 2(1), pages 87-114, April.
    3. Diaz-Serrano, Luis, 2005. "On the negative relationship between labor income uncertainty and homeownership: Risk-aversion vs. credit constraints," Journal of Housing Economics, Elsevier, vol. 14(2), pages 109-126, June.
    4. Richard Anderson & James VanderHoff, 1999. "Mortgage Default Rates and Borrower Race," Journal of Real Estate Research, American Real Estate Society, vol. 18(2), pages 279-290.
    5. Ross, Stephen L. & Tootell, Geoffrey M. B., 2004. "Redlining, the Community Reinvestment Act, and private mortgage insurance," Journal of Urban Economics, Elsevier, vol. 55(2), pages 278-297, March.
    6. Diaz-Serrano, Luis, 2005. "Labor income uncertainty, skewness and homeownership: A panel data study for Germany and Spain," Journal of Urban Economics, Elsevier, vol. 58(1), pages 156-176, July.
    7. Yongheng Deng & John M. Quigley & Robert Van Order, 1995. "Mortgage Default and Low Downpayment Loans: The Costs of Public Subsidy," NBER Working Papers 5184, National Bureau of Economic Research, Inc.
    8. Joop Hartog & Erik Plug & Luis Diaz Serrano & Jose Vieira, 2003. "Risk compensation in wages – a replication," Empirical Economics, Springer, vol. 28(3), pages 639-647, July.
    9. Arrondel, L., 2000. "Risk Management and Wealth Accumulation Behavior in France," DELTA Working Papers 2000-18, DELTA (Ecole normale supérieure).
    10. Robst, John & Deitz, Richard & McGoldrick, KimMarie, 1999. "Income variability, uncertainty and housing tenure choice1," Regional Science and Urban Economics, Elsevier, vol. 29(2), pages 219-229, March.
    11. Guiso, Luigi & Jappelli, Tullio & Terlizzese, Daniele, 1992. "Earnings uncertainty and precautionary saving," Journal of Monetary Economics, Elsevier, vol. 30(2), pages 307-337, November.
    12. Kerry D. Vandell & Thomas Thibodeau, 1985. "Estimation of Mortgage Defaults Using Disaggregate Loan History Data," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 13(3), pages 292-316.
    13. Pryce, Gwilym, 2002. "Theory and Estimation of the Mortgage Payment Protection Insurance Decision," Scottish Journal of Political Economy, Scottish Economic Society, vol. 49(2), pages 216-34, May.
    14. Peter Chinloy, 1995. "Privatized Default Risk and Real Estate Recessions: The U.K. Mortgage Market," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 23(4), pages 401-420.
    15. Kau, James B. & Keenan, Donald C., 1999. "Patterns of rational default," Regional Science and Urban Economics, Elsevier, vol. 29(6), pages 765-785, November.
    16. Piet M.A. Eichholtz, 1995. "Regional Economic Stability and Mortgage Default Risk in the Netherlands," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 23(4), pages 421-439.
    17. Stephen L Ross, 2000. "Mortgage Lending, Sample Selection and Default," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 28(4), pages 581-621.
    18. Jappelli, Tullio & Pagano, Marco, 1988. "Consumption and Capital Market Imperfection: An International Comparison," CEPR Discussion Papers 244, C.E.P.R. Discussion Papers.
    19. Jonathan S. Skinner, 1987. "Risky Income, Life Cycle Consumption, and Precautionary Savings," NBER Working Papers 2336, National Bureau of Economic Research, Inc.
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