IDEAS home Printed from https://ideas.repec.org/a/eee/jbfina/v72y2016icp15-27.html
   My bibliography  Save this article

Some defaults are deeper than others: Understanding long-term mortgage arrears

Author

Listed:
  • Kelly, Robert
  • McCann, Fergal

Abstract

The 2007–2008 financial crisis yielded a significant number of delinquent mortgage loans, which ordinarily would have faced foreclosure and repossession. However, given the negative externalities of repossession, policy response has shifted towards forbearance and mortgage modification, which has led to longer spells in default for delinquent mortgage holders. It is therefore imperative to move beyond binary models of default towards an understanding of the factors that drive the depth of default spells. Exploiting a highly detailed dataset on financially distressed households in Ireland in 2012 and 2013, we are able to identify the impact of a range of current household-level factors, generally not available in loan-level studies of mortgage default, on the probability of entering early and deep states of mortgage default. Our results suggest that high loan-to-value ratios, consumer credit growth, shocks to mortgage affordability and unemployment should all trigger serious concerns among policy makers regarding subsequent stability in the mortgage market, with these measures all shown to have differentially large impacts on entry to deep, relative to early-stage arrears.

Suggested Citation

  • Kelly, Robert & McCann, Fergal, 2016. "Some defaults are deeper than others: Understanding long-term mortgage arrears," Journal of Banking & Finance, Elsevier, vol. 72(C), pages 15-27.
    • Handle: RePEc:eee:jbfina:v:72:y:2016:i:c:p:15-27
    DOI: 10.1016/j.jbankfin.2016.07.006
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0378426616301194
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.jbankfin.2016.07.006?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to look for a different version below or search for a different version of it.

    Other versions of this item:

    References listed on IDEAS

    as
    1. Atif Mian & Amir Sufi & Francesco Trebbi, 2015. "Foreclosures, House Prices, and the Real Economy," Journal of Finance, American Finance Association, vol. 70(6), pages 2587-2634, December.
    2. Kennedy, Gerard & McIndoe-Calder, Tara, 2012. "The Irish Mortgage Market: Stylised Facts, Negative Equity and Arrears," Quarterly Bulletin Articles, Central Bank of Ireland, pages 85-108, February.
    3. Qi, Min & Yang, Xiaolong, 2009. "Loss given default of high loan-to-value residential mortgages," Journal of Banking & Finance, Elsevier, vol. 33(5), pages 788-799, May.
    4. Òscar Jordà & Moritz Schularick & Alan M. Taylor, 2016. "The great mortgaging: housing finance, crises and business cycles," Economic Policy, CEPR, CESifo, Sciences Po;CES;MSH, vol. 31(85), pages 107-152.
    5. Kristopher Gerardi & Kyle F. Herkenhoff & Lee E. Ohanian & Paul S. Willen, 2018. "Can’t Pay or Won’t Pay? Unemployment, Negative Equity, and Strategic Default," Review of Financial Studies, Society for Financial Studies, vol. 31(3), pages 1098-1131.
    6. Ronel Elul & Nicholas S. Souleles & Souphala Chomsisengphet & Dennis Glennon & Robert Hunt, 2010. "What "Triggers" Mortgage Default?," American Economic Review, American Economic Association, vol. 100(2), pages 490-494, May.
    7. Kau, James B. & Keenan, Donald C. & Lyubimov, Constantine & Carlos Slawson, V., 2011. "Subprime mortgage default," Journal of Urban Economics, Elsevier, vol. 70(2), pages 75-87.
    8. Foote, Christopher L. & Gerardi, Kristopher & Willen, Paul S., 2008. "Negative equity and foreclosure: Theory and evidence," Journal of Urban Economics, Elsevier, vol. 64(2), pages 234-245, September.
    9. McCarthy, Yvonne, 2014. "Dis-entangling the mortgage arrears crisis: The rolw of the labour market, income volatility and housing equity," Research Technical Papers 02/RT/14, Central Bank of Ireland.
    10. Luigi Guiso & Paola Sapienza & Luigi Zingales, 2013. "The Determinants of Attitudes toward Strategic Default on Mortgages," Journal of Finance, American Finance Association, vol. 68(4), pages 1473-1515, August.
    11. Christopher Mayer & Edward Morrison & Tomasz Piskorski & Arpit Gupta, 2014. "Mortgage Modification and Strategic Behavior: Evidence from a Legal Settlement with Countrywide," American Economic Review, American Economic Association, vol. 104(9), pages 2830-2857, September.
    12. Patrick Bajari & Chenghuan Sean Chu & Minjung Park, 2008. "An Empirical Model of Subprime Mortgage Default From 2000 to 2007," NBER Working Papers 14625, National Bureau of Economic Research, Inc.
    13. John Y. Campbell & Stefano Giglio & Parag Pathak, 2011. "Forced Sales and House Prices," American Economic Review, American Economic Association, vol. 101(5), pages 2108-2131, August.
    14. Been, Vicki & Weselcouch, Mary & Voicu, Ioan & Murff, Scott, 2013. "Determinants of the incidence of U.S. Mortgage Loan Modifications," Journal of Banking & Finance, Elsevier, vol. 37(10), pages 3951-3973.
    15. Reamonn Lyndon & Yvonne McCarthy, 2013. "What Lies Beneath? Understanding Recent Trends in Irish Mortgage Arrears," The Economic and Social Review, Economic and Social Studies, vol. 44(1), pages 117-150.
    16. Kelly, Robert & O’Malley, Terence, 2016. "The good, the bad and the impaired: A credit risk model of the Irish mortgage market," Journal of Financial Stability, Elsevier, vol. 22(C), pages 1-9.
    17. Kristopher Gerardi & Eric Rosenblatt & Paul S. Willen & Vincent W. Yao, 2012. "Foreclosure externalities: some new evidence," Public Policy Discussion Paper 12-5, Federal Reserve Bank of Boston.
    18. Kelly, Robert & O'Malley, Terry & O'Toole, Conor, 2014. "Do first time buyers default less? Implications for macro-prudential policy," Economic Letters 14/EL/14, Central Bank of Ireland.
    19. McCann, Fergal, 2014. "Modelling default transitions in the UK mortgage market," Research Technical Papers 18/RT/14, Central Bank of Ireland.
    20. Boheim, Rene & Taylor, Mark P., 2000. "My Home Was My Castle: Evictions and Repossessions in Britain," Journal of Housing Economics, Elsevier, vol. 9(4), pages 287-319, December.
    21. Christopher Mayer & Karen Pence & Shane M. Sherlund, 2009. "The Rise in Mortgage Defaults," Journal of Economic Perspectives, American Economic Association, vol. 23(1), pages 27-50, Winter.
    22. Gyourko, Joseph & Tracy, Joseph, 2014. "Reconciling theory and empirics on the role of unemployment in mortgage default," Journal of Urban Economics, Elsevier, vol. 80(C), pages 87-96.
    23. Kau, James B. & Keenan, Donald C. & Lyubimov, Constantine & Carlos Slawson, V., 2011. "Subprime mortgage default," Journal of Urban Economics, Elsevier, vol. 70(2-3), pages 75-87, September.
    24. Neil Bhutta & Jane K. 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.).
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Kelly, Jane & Mazza, Elena, 2019. "Mortgage servicing burdens and LTI caps," Financial Stability Notes 13/FS/19, Central Bank of Ireland.
    2. Yosi Borochov & Boris A. Portnov, 2021. "Estimating Environmentally Adjusted Risks of Mortgage Arrears for Different Socioeconomic Groups of Borrowers," European Research Studies Journal, European Research Studies Journal, vol. 0(2), pages 595-620.
    3. McCann, Fergal & O'Malley, Terry, 2020. "Resolving mortgage distress after COVID-19: some lessons from the last crisis," Financial Stability Notes 7/FS/20, Central Bank of Ireland.
    4. Andrew Linn & Ronan C. Lyons, 2020. "Three Triggers? Negative Equity, Income Shocks and Institutions as Determinants of Mortgage Default," The Journal of Real Estate Finance and Economics, Springer, vol. 61(4), pages 549-575, November.
    5. McInerney, Niall, 2019. "Macroprudential Policy, Banking and the Real Estate Sector," MPRA Paper 91777, University Library of Munich, Germany.
    6. Arno Botha & Conrad Beyers & Pieter de Villiers, 2019. "A procedure for loss-optimising default definitions across simulated credit risk scenarios," Papers 1907.12615, arXiv.org, revised Feb 2021.
    7. Andrew Linn & Ronan C Lyons, 2018. "The Triple Trigger? Negative Equity, Income Shocks and Institutions as Determinants of Mortgage Default," Trinity Economics Papers tep0718, Trinity College Dublin, Department of Economics.
    8. McCann, Fergal & McGeever, Niall, 2018. "Cures and Exits: the drivers of NPL resolution in Ireland from 2012 to 2017," Financial Stability Notes 06-18, Central Bank of Ireland.
    9. Danne, Christian & McGuinness, Anne, 2016. "Mortgage modifications and loan performance," Research Technical Papers 05/RT/16, Central Bank of Ireland.
    10. McCann, Fergal & McGeever, Niall, 2018. "Cures and Exits: the drivers of NPL resolution in Ireland from 2012 to 2017," Financial Stability Notes 6/FS/18, Central Bank of Ireland.
    11. Donnery, Sharon & Fitzpatrick, Trevor & Greaney, Darren & McCann, Fergal & O'Keeffe, Micheal, 2018. "Resolving Non-Performing Loans in Ireland: 2010-2018," Quarterly Bulletin Articles, Central Bank of Ireland, pages 54-70, April.
    12. Alin Marius Andries & Anca Copaciu & Radu Popa & Razvan Vlahu, 2021. "Recourse and (strategic) mortgage defaults: Evidence from changes in housing market laws," Working Papers 727, DNB.
    13. Kelly, Robert & McCann, Fergal, 2015. "Households in long-term mortgage arrears:lessons from economic research," Economic Letters 11/EL/15, Central Bank of Ireland.
    14. McCann, Fergal, 2017. "Borrower-lender engagement during the Irish mortgage arrears crisis," Economic Letters 17/EL/17, Central Bank of Ireland.
    15. Byrne, David & McCann, Fergal & Gaffney, Edward, 2023. "The interest rate exposure of mortgaged Irish households," Financial Stability Notes 2/FS/23, Central Bank of Ireland.
    16. Damian S. Damianov & Xiangdong Wang & Cheng Yan, 2021. "Google Search Queries, Foreclosures, and House Prices," The Journal of Real Estate Finance and Economics, Springer, vol. 63(2), pages 177-209, August.
    17. Arno Botha & Conrad Beyers & Pieter de Villiers, 2020. "Simulation-based optimisation of the timing of loan recovery across different portfolios," Papers 2009.11064, arXiv.org, revised Apr 2021.
    18. Shaikh, Sameer & Kilgarriff, Paul & Gaffney, Edward, 2023. "Exploring missed mortgage payments in the first year of monetary tightening," Financial Stability Notes 9/FS/23, Central Bank of Ireland.
    19. Wilfred K. Anim-Odame & Precious Angelo Brenni & Damian Damianov & Dennis Philip, 2018. "Residential Occupancy and Property Tax Default," ERES eres2018_214, European Real Estate Society (ERES).

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. McCann, Fergal, 2014. "Modelling default transitions in the UK mortgage market," Research Technical Papers 18/RT/14, Central Bank of Ireland.
    2. Slaymaker, Rachel & O'Toole, Conor & McQuinn, Kieran & Fahy, Mike, 2018. "Monetary policy normalisation and mortgage arrears in a recovering economy: The case of the Irish residential market," Papers WP613, Economic and Social Research Institute (ESRI).
    3. Kelly, Robert & O'Malley, Terence, 2014. "A Transitions-Based Model of Default for Irish Mortgages," Research Technical Papers 17/RT/14, Central Bank of Ireland.
    4. John Y. Campbell, 2013. "Mortgage Market Design," Review of Finance, European Finance Association, vol. 17(1), pages 1-33.
    5. Kelly, Robert & O’Malley, Terence, 2016. "The good, the bad and the impaired: A credit risk model of the Irish mortgage market," Journal of Financial Stability, Elsevier, vol. 22(C), pages 1-9.
    6. O’Toole, Conor & Slaymaker, Rachel, 2021. "Repayment capacity, debt service ratios and mortgage default: An exploration in crisis and non-crisis periods," Journal of Banking & Finance, Elsevier, vol. 133(C).
    7. Kristopher Gerardi & Kyle F. Herkenhoff & Lee E. Ohanian & Paul S. Willen, 2018. "Can’t Pay or Won’t Pay? Unemployment, Negative Equity, and Strategic Default," The Review of Financial Studies, Society for Financial Studies, vol. 31(3), pages 1098-1131.
    8. Thomas Schelkle, 2018. "Mortgage Default during the U.S. Mortgage Crisis," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 50(6), pages 1101-1137, September.
    9. Maximilian Schmeiser & Matthew Gross, 2016. "The Determinants of Subprime Mortgage Performance Following a Loan Modification," The Journal of Real Estate Finance and Economics, Springer, vol. 52(1), pages 1-27, January.
    10. Fernando Ferreira & Joseph Gyourko, 2015. "A New Look at the U.S. Foreclosure Crisis: Panel Data Evidence of Prime and Subprime Borrowers from 1997 to 2012," NBER Working Papers 21261, National Bureau of Economic Research, Inc.
    11. Reamonn Lyndon & Yvonne McCarthy, 2013. "What Lies Beneath? Understanding Recent Trends in Irish Mortgage Arrears," The Economic and Social Review, Economic and Social Studies, vol. 44(1), pages 117-150.
    12. Goodstein, Ryan & Hanouna, Paul & Ramirez, Carlos D. & Stahel, Christof W., 2017. "Contagion effects in strategic mortgage defaults," Journal of Financial Intermediation, Elsevier, vol. 30(C), pages 50-60.
    13. Adam M Guren & Timothy J McQuade, 2020. "How Do Foreclosures Exacerbate Housing Downturns?," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 87(3), pages 1331-1364.
    14. Asish Saha & Hock-Eam Lim & Goh-Yeok Siew, 2021. "Housing Loan Repayment Behaviour in Malaysia: An Analytical Insight," International Journal of Business and Economics, School of Management Development, Feng Chia University, Taichung, Taiwan, vol. 20(2), pages 141-159, September.
    15. Alin Marius Andries & Anca Copaciu & Radu Popa & Razvan Vlahu, 2021. "Recourse and (strategic) mortgage defaults: Evidence from changes in housing market laws," Working Papers 727, DNB.
    16. Lazarov, Vladimir & Hinterschweiger, Marc, 2018. "Determinants of distress in the UK owner-occupier and buy-to-let mortgage markets," Bank of England working papers 760, Bank of England.
    17. Damian Damianov & Cheng Yan & Xiangdong Wang, 2018. "Measures of mortgage default risk and local house price dynamics ," ERES eres2018_163, European Real Estate Society (ERES).
    18. Merike Kukk, 2023. "What are the triggers for arrears on debt over a business cycle? Evidence from panel data," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 28(3), pages 2811-2833, July.
    19. Richard Chamboko & Jorge Miguel Bravo, 2020. "A Multi-State Approach to Modelling Intermediate Events and Multiple Mortgage Loan Outcomes," Risks, MDPI, vol. 8(2), pages 1-29, June.
    20. Kelly, Robert & O'Malley, Terence & O'Toole, Conor, 2015. "Designing Macro-prudential Policy in Mortgage Lending: Do First Time Buyers Default Less?," Research Technical Papers 02/RT/15, Central Bank of Ireland.

    More about this item

    Keywords

    Mortgages; Default; Days past due; Affordability;
    All these keywords.

    JEL classification:

    • D14 - Microeconomics - - Household Behavior - - - Household Saving; Personal Finance
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:jbfina:v:72:y:2016:i:c:p:15-27. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/jbf .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.