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“Modelling and forecasting mortgage delinquency and foreclosure in the UK.”

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  • Aron, Janine
  • Muellbauer, John

Abstract

In the absence of micro-data in the public domain, new aggregate models for the UK's mortgage repossessions and arrears are estimated using quarterly data over 1983–2014, motivated by a conceptual double trigger frame framework for foreclosures and payment delinquencies. An innovation to improve on the flawed but widespread use of loan-to-value measures, is to estimate difficult-to-observe variations in loan quality and access to refinancing, and shifts in lenders’ forbearance policy, by common latent variables in a system of equations for arrears and repossessions. We introduce, for the first time in the literature, a theory-justified estimate of the proportion of mortgages in negative equity as a key driver of aggregate repossessions and arrears. This is based on an average debt–equity ratio, corrected for regional deviations, and uses a functional form for the distribution of the debt–equity ratio checked on Irish micro-data from the Bank of Ireland, and Bank of England snapshots of negative equity. We systematically address serious measurement bias in the ‘months-in-arrears’ measures, neglected in previous UK studies. Highly significant effects on aggregate rates of repossessions and arrears are found for the aggregate debt–service ratio, the proportion of mortgages in negative equity and the unemployment rate. Economic forecast scenarios to 2020 highlight risks faced by the UK and its mortgage lenders, illustrating the usefulness of the approach for bank stress-testing. For macroeconomics, our model traces an important part of the financial accelerator: the feedback from the housing market to bad loans and hence banks’ ability to extend credit.

Suggested Citation

  • Aron, Janine & Muellbauer, John, 2016. "“Modelling and forecasting mortgage delinquency and foreclosure in the UK.”," Journal of Urban Economics, Elsevier, vol. 94(C), pages 32-53.
  • Handle: RePEc:eee:juecon:v:94:y:2016:i:c:p:32-53
    DOI: 10.1016/j.jue.2016.03.005
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    Cited by:

    1. Bracke, Philippe & Hilber, Christian A.L. & Silva, Olmo, 2018. "Mortgage debt and entrepreneurship," Journal of Urban Economics, Elsevier, vol. 103(C), pages 52-66.
    2. McInerney, Niall, 2019. "Macroprudential Policy, Banking and the Real Estate Sector," MPRA Paper 91777, University Library of Munich, Germany.
    3. Richard Chamboko & Jorge Miguel Bravo, 2020. "A Multi-State Approach to Modelling Intermediate Events and Multiple Mortgage Loan Outcomes," Risks, MDPI, Open Access Journal, vol. 8(2), pages 1-28, June.
    4. 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.
    5. James A Kahn & Benjamin S Kay, 2020. "The impact of credit risk mispricing on mortgage lending during the subprime boom," BIS Working Papers 875, Bank for International Settlements.
    6. Stanga, Irina & Vlahu, Razvan & de Haan, Jakob, 2020. "Mortgage arrears, regulation and institutions: Cross-country evidence," Journal of Banking & Finance, Elsevier, vol. 118(C).
    7. Bracke, Philippe & Datta, Anupam & Jung, Carsten & Sen, Shayak, 2019. "Machine learning explainability in finance: an application to default risk analysis," Bank of England working papers 816, Bank of England.
    8. Liu, Lu, 2019. "Non-salient fees in the mortgage market," Bank of England working papers 819, Bank of England.
    9. Fergus Cumming, 2019. "Mortgage Cash-flows and Employment," Discussion Papers 1922, Centre for Macroeconomics (CFM).
    10. Chauvet, Marcelle & Gabriel, Stuart & Lutz, Chandler, 2016. "Mortgage default risk: New evidence from internet search queries," Journal of Urban Economics, Elsevier, vol. 96(C), pages 91-111.
    11. Zhechun He & Peter Simmons, 2018. "A Life Cycle Model with Housing Tenure, Constrained Mortgage Finance and a Risky Asset under Uncertainty," Discussion Papers 18/18, Department of Economics, University of York.
    12. Muellbauer, John, 2016. "Macroeconomics and Consumption," CEPR Discussion Papers 11588, C.E.P.R. Discussion Papers.
    13. O'Toole, Conor & Slaymaker, Rachel, 2020. "Repayment capacity, debt service ratios and mortgage default: An exploration in crisis and non-crisis periods," Papers WP652, Economic and Social Research Institute (ESRI).
    14. Cumming, Fergus, 2018. "Mortgages, cash-flow shocks and local employment," Bank of England working papers 773, Bank of England.
    15. Jorge E. Galán & Matías Lamas, 2019. "Beyond the LTV ratio: new macroprudential lessons from Spain," Working Papers 1931, Banco de España;Working Papers Homepage.
    16. Mitrašević, Mirela & Bardarova, Snezana, 2020. "Causes Of Non-Payment Of Mortgage Loans: Theoretical And Practical Aspects," UTMS Journal of Economics, University of Tourism and Management, Skopje, Macedonia, vol. 11(2), pages 138-150.
    17. James A. Kahn & Benjamin S. Kay, 2019. "The Impact of Credit Risk Mispricing on Mortgage Lending during the Subprime Boom," Finance and Economics Discussion Series 2019-046, Board of Governors of the Federal Reserve System (U.S.).
    18. Guin, Benjamin & Korhonen, Perttu, 2020. "Does energy efficiency predict mortgage performance?," Bank of England working papers 852, Bank of England.

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    More about this item

    Keywords

    Foreclosures; Mortgage repossessions; Mortgage payment delinquencies; Mortgage arrears; Credit risk stress testing; Latent variables model;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation
    • R28 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Household Analysis - - - Government Policy
    • R21 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Household Analysis - - - Housing Demand
    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
    • E27 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Forecasting and Simulation: Models and Applications

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