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Delivering Debt Relief through the Banking Sector: Lessons from the Irish Mortgage Market

Author

Listed:
  • Labonne, Claire

    (Federal Reserve Bank of Boston)

  • McCann, Fergal

    (Central Bank of Ireland)

  • O'Malley, Terry

    (Udemy, inc.)

Abstract

How do banks design mortgage modifications when under regulatory expectation to issue them widely and quickly? Who do they allocate modifications to, and how deep are repayment cuts? How many modified loans end up re-defaulting? A large-scale Irish program allows us to tackle these questions using household- and loan-level data from 2012 to 2016. We show that the issuance of permanent modifications is not uniform across the credit risk distribution: those with a moderate ability to repay are more likely to receive a modification than those in deepest financial difficulty. Repayment cuts however are more generous as repayment capacity weakens, as long as borrowers have some surplus income available to service debt. Finally, deeper repayment cuts and lower payment-to-income ratios lower redefault rates, confirming prior evidence on the importance of liquidity for mortgage distress.

Suggested Citation

  • Labonne, Claire & McCann, Fergal & O'Malley, Terry, 2021. "Delivering Debt Relief through the Banking Sector: Lessons from the Irish Mortgage Market," Research Technical Papers 6/RT/21, Central Bank of Ireland.
    • Handle: RePEc:cbi:wpaper:6/rt/21
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    File URL: https://www.centralbank.ie/docs/default-source/publications/research-technical-papers/06rt21-delivering-debt-relief-through-the-banking-sector-lessons-from-the-irish-mortgage-market-labonne-mccann-and-omalley.pdf?sfvrsn=8
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    More about this item

    Keywords

    Mortgage Default; Mortgage Modification;

    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
    • G51 - Financial Economics - - Household Finance - - - Household Savings, Borrowing, Debt, and Wealth

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