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Income Shocks, Mortgage Repayment Risk and Financial Distress Among UK Households

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  • John Gathergood

Abstract

This paper examines the prevalence of mortgage arrears in the U.K using the British Household Panel Survey (BHPS). The majority of reported problems occur in the first few years after purchase. Episodes of unemployment, long-term sickness or relationship breakdown all predict repayment difficulties, as well as measures of leverage and income gearing at the point of origination. Using proxy measures for unemployment risk, ill-health risk and separation risk at the time of purchase, constructed from a variety of instruments, repayment difficulties are shown to be strongly correlated with ex ante repayment risk. This result raises questions about the efficiency of the mortgage lending process and the possibility that a significant proportion of mortgage arrears and defaults could be prevented by improved screening of repayment risk at the time of application.

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Paper provided by University of Nottingham, Centre for Finance, Credit and Macroeconomics (CFCM) in its series Discussion Papers with number 09/03.

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Handle: RePEc:not:notcfc:09/03

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Cited by:
  1. Gerardi, Kristopher & Herkenhoff, Kyle F. & Ohanian, Lee E. & Willen, Paul S., 2013. "Unemployment, negative equity, and strategic default," Working Paper, Federal Reserve Bank of Atlanta 2013-04, Federal Reserve Bank of Atlanta.
  2. Janine Aron & John Muellbauer, 2010. "Modelling and Forecasting UK Mortgage Arrears and Possessions," SERC Discussion Papers, Spatial Economics Research Centre, LSE 0052, Spatial Economics Research Centre, LSE.

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