Irish Mortgage Default Optionality
AbstractThe 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 InfoPaper 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.
Length: 43 pages
Date of creation: 2013
Date of revision:
mortgage default; put optionality;
Find related papers by JEL classification:
- R30 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Real Estate Markets, Spatial Production Analysis, and Firm Location - - - General
- G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
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