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Strategic, unaffordability and dual-trigger default in the Irish mortgage market

Listed author(s):
  • Connor, Gregory
  • Flavin, Thomas

A mortgage holder whose property is worth less than the repayment value of the mortgage may decide to strategically default, i.e., renege on the cash flow liability of the mortgage loan and surrender the property to the mortgage issuer. In other circumstances a mortgage holder may default due to personal income decline which makes payment infeasible (unaffordability default) or for a combination of strategic and affordability causes (dual-trigger default). This paper utilizes a database of troubled Irish mortgages to model the default decisions of Irish mortgage holders. We include both affordability-related and strategic-related explanatory variables. We find that both types of explanatory variables play a role in the explosive growth in Irish mortgage default after the Irish banking crisis and temporary legal prohibition of property repossession. We find that a dual-trigger model of default best fits the Irish data. Given the unusual features of the Irish market, our findings both complement and strengthen existing empirical findings from other national mortgage markets.

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File URL: http://www.sciencedirect.com/science/article/pii/S1051137714000618
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Article provided by Elsevier in its journal Journal of Housing Economics.

Volume (Year): 28 (2015)
Issue (Month): C ()
Pages: 59-75

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Handle: RePEc:eee:jhouse:v:28:y:2015:i:c:p:59-75
DOI: 10.1016/j.jhe.2014.12.003
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/622881

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  1. Trautmann, Stefan T. & Vlahu, Razvan, 2013. "Strategic loan defaults and coordination: An experimental analysis," Journal of Banking & Finance, Elsevier, vol. 37(3), pages 747-760.
  2. Charles Bellemare & Bertrand Melenberg & Arthur van Soest van Soest, 2002. "Semi-parametric models for satisfaction with income," CeMMAP working papers CWP12/02, Centre for Microdata Methods and Practice, Institute for Fiscal Studies.
  3. Luigi Guiso & Paola Sapienza & Luigi Zingales, 2009. "Moral and Social Constraints to Strategic Default on Mortgages," Economics Working Papers ECO2009/27, European University Institute.
  4. Connor, Gregory & Flavin, Thomas & O’Kelly, Brian, 2012. "The U.S. and Irish credit crises: Their distinctive differences and common features," Journal of International Money and Finance, Elsevier, vol. 31(1), pages 60-79.
  5. 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.
  6. 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.
  7. Gregory Connor & Thomas Flavin, 2014. "Unpublished Appendix:Ancillary Results and Robustness Checks on a Probit Model of Irish Mortgage Defaults," Economics, Finance and Accounting Department Working Paper Series n253-14.pdf, Department of Economics, Finance and Accounting, National University of Ireland - Maynooth.
  8. Cameron,A. Colin & Trivedi,Pravin K., 2005. "Microeconometrics," Cambridge Books, Cambridge University Press, number 9780521848053, September.
  9. 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 239-270, March.
  10. 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.
  11. 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.).
  12. Michael J. Seiler & Vicky L. Seiler & Mark A. Lane & David M. Harrison, 2012. "Fear, Shame and Guilt: Economic and Behavioral Motivations for Strategic Default," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 40, pages 199-233, December.
  13. 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.
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