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Irish Mortgage Default Optionality

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Author Info

  • Gregory Connor

    ()
    (Department of Economics Finance and Accounting, National University of Ireland, Maynooth)

  • Thomas Flavin

    ()
    (Department of Economics Finance and Accounting, National University of Ireland, Maynooth)

Abstract

The owner of a residential property subject to a nonrecourse mortgage essentially has a put option against the market value of the property. If the market price of the property falls sufficiently, the owner can surrender the property to the mortgage issuer and in exchange receive full offset of the cashfl?ow liability of the mortgage loan. A similar but diluted put optionality holds for recourse mortgages if there are legal or practical limits to the mortgage issuer?s recourse claim against the owner?s future income. Previous research based on American data fi?nds that put optionality is an important, but not exclusive, determinant of mortgage default. This paper utilizes a database of troubled Irish mortgages to analyze the infl?uence of put optionality on Irish property owners' ?default behaviour. We fi?nd that put optionality is a very important explanatory variable for observed Irish mortgage defaults, complementing and strengthening existing empirical fi?ndings from US mortgage markets.

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Bibliographic Info

Paper provided by Department of Economics, Finance and Accounting, National University of Ireland - Maynooth in its series Economics, Finance and Accounting Department Working Paper Series with number n243-13.pdf.

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Length: 43 pages
Date of creation: 2013
Date of revision:
Handle: RePEc:may:mayecw:n243-13.pdf

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Postal: Maynooth, Co. Kildare
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Keywords: mortgage default; put optionality;

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  1. Ronel Elul & Nicholas S. Souleles & Souphala Chomsisengphet & Dennis & Glennon & Robert Hunt, 2010. "What "triggers" mortgage default?," Working Papers 10-13, Federal Reserve Bank of Philadelphia.
  2. Matzkin, Rosa L, 1992. "Nonparametric and Distribution-Free Estimation of the Binary Threshold Crossing and the Binary Choice Models," Econometrica, Econometric Society, vol. 60(2), pages 239-70, March.
  3. Yongheng Deng & John M. Quigley & Robert Van Order, 2000. "Mortgage Terminations, Heterogeneity and the Exercise of Mortgage Options," Econometrica, Econometric Society, vol. 68(2), pages 275-308, March.
  4. Christopher L. Foote & Kristopher Gerardi & Paul S. Willen, 2008. "Negative equity and foreclosure: theory and evidence," Public Policy Discussion Paper 08-3, Federal Reserve Bank of Boston.
  5. Härdle, Wolfgang & Huet, Sylvie & Mammen, Enno & Sperlich, Stefan, 2001. "Bootstrap Inference in Semiparametric Generalized Additive Models," Finance Working Papers 01-3, University of Aarhus, Aarhus School of Business, Department of Business Studies.
  6. Giuseppe De Luca, 2008. "SNP and SML estimation of univariate and bivariate binary-choice models," Stata Journal, StataCorp LP, vol. 8(2), pages 190-220, June.
  7. Bellemare, C. & Melenberg, B. & Soest, A.H.O. van, 2002. "Semi-parametric Models for Satisfaction with Income," Discussion Paper 2002-87, Tilburg University, Center for Economic Research.
  8. Lydon, Reamonn & McCarthy, Yvonne, 2011. "What Lies Beneath? Understanding Recent Trends in Irish Mortgage Arrears," Research Technical Papers 14/RT/11, Central Bank of Ireland.
  9. Neil Bhutta & Jane Dokko & Hui Shan, 2010. "The depth of negative equity and mortgage default decisions," Finance and Economics Discussion Series 2010-35, Board of Governors of the Federal Reserve System (U.S.).
  10. Joel L. Horowitz & N. E. Savin, 2001. "Binary Response Models: Logits, Probits and Semiparametrics," Journal of Economic Perspectives, American Economic Association, vol. 15(4), pages 43-56, Fall.
  11. James F. Epperson & James B. Kau & Donald C. Keenan & Walter J. Muller, 1985. "Pricing Default Risk in Mortgages," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 13(3), pages 261-272.
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