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A model of mortgage losses and its applications for macroprudential instruments

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  • Hott, Christian

Abstract

We develop a theoretical model of mortgage loss rates that evaluates their main underlying risk factors. Following the model, loss rates are positively influenced by the house price level, the loan-to-value of mortgages, interest rates, and the unemployment rate. They are negatively influenced by the growth of house prices and the income level. The calibration of the model for the US and Switzerland demonstrates that it is able to describe the overall development of actual mortgage loss rates. In addition, we show potential applications of the model for different macroprudential instruments: stress tests, countercyclical buffer, and setting risk weights for mortgages with different loan-to-value and loan-to-income ratios. --

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Bibliographic Info

Paper provided by Deutsche Bundesbank, Research Centre in its series Discussion Papers with number 34/2013.

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Date of creation: 2013
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Handle: RePEc:zbw:bubdps:342013

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Keywords: Mortgage Market; Credit Risk; Macroprudential Instruments;

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  1. Charles Himmelberg & Christopher Mayer & Todd Sinai, 2005. "Assessing High House Prices: Bubbles, Fundamentals and Misperceptions," Journal of Economic Perspectives, American Economic Association, vol. 19(4), pages 67-92, Fall.
  2. Haughwout, Andrew & Peach, Richard & Tracy, Joseph, 2008. "Juvenile delinquent mortgages: Bad credit or bad economy?," Journal of Urban Economics, Elsevier, vol. 64(2), pages 246-257, September.
  3. Lambrecht, Bart & Perraudin, William & Satchell, Stephen, 1997. "Time to default in the UK mortgage market," Economic Modelling, Elsevier, Elsevier, vol. 14(4), pages 485-499, October.
  4. Christian Hott & Pierre Monnin, 2008. "Fundamental Real Estate Prices: An Empirical Estimation with International Data," The Journal of Real Estate Finance and Economics, Springer, Springer, vol. 36(4), pages 427-450, May.
  5. Hott, C., 2011. "Lending behavior and real estate prices," Journal of Banking & Finance, Elsevier, Elsevier, vol. 35(9), pages 2429-2442, September.
  6. Campbell, John Y. & Cocco, João F., 2014. "A model of mortgage default," CFS Working Paper Series 452, Center for Financial Studies (CFS).
  7. Richard K. Green & Susan M. Wachter, 2005. "The American Mortgage in Historical and International Context," Working Paper, USC Lusk Center for Real Estate 9094, USC Lusk Center for Real Estate.
  8. Jonathan McCarthy & Richard W. Peach, 2004. "Are home prices the next "bubble"?," Economic Policy Review, Federal Reserve Bank of New York, Federal Reserve Bank of New York, issue Dec, pages 1-17.
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