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The Determinants of Household Debt Defa

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  • Rodrigo Alfaro
  • Natalia Gallardo
  • Roberto Stein

Abstract

Based on a new dataset obtained from survey data, we study household debt default behavior in Chile. Previous research in this area suggests financial and personal variables that can help estimate individual and group probabilities of default. We study mortgage and consumer default separately, as the default decisions and overall borrower behavior are different for each type of debt. Our study finds that income and income-related variables are the only significant and robust variables that explain default for both types of debt. Demographic or personal variables are specific to one or the other type of debt but not to both. For example, level of education is a factor that affects mortgage default, whereas the determinants of consumer debt default include the age of the household head, and the number of people within the household that contribute to the total family income. We derive threshold probabilities of default for each type of debt and compare them to those obtained from results of previous work based on the same Chilean data, but with a different approach. We find that the probability of default decreases as the family income increases, and that our estimates are consistent with other studies similar to ours. Also consistently with previous research, we find that, in terms of the distribution of debt and default risk, the largest portion of the country’s household debt is in the hands of families in the upper quintiles, who have the lowest risk of default. This implies that the overall financial system should be relatively stable, even in the face of moderate macroeconomic shocks.

Suggested Citation

  • Rodrigo Alfaro & Natalia Gallardo & Roberto Stein, 2010. "The Determinants of Household Debt Defa," Working Papers Central Bank of Chile 574, Central Bank of Chile.
  • Handle: RePEc:chb:bcchwp:574
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    References listed on IDEAS

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    1. Lawrence, Edward C. & Smith, L. Douglas & Rhoades, Malcolm, 1992. "An analysis of default risk in mobile home credit," Journal of Banking & Finance, Elsevier, vol. 16(2), pages 299-312, April.
    2. Avery, Robert B. & Calem, Paul S. & Canner, Glenn B., 2004. "Consumer credit scoring: Do situational circumstances matter?," Journal of Banking & Finance, Elsevier, vol. 28(4), pages 835-856, April.
    3. Ingram, F. Jerry & Frazier, Emma L., 1982. "Alternative Multivariate Tests in Limited Dependent Variable Models: An Empirical Assessment," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 17(02), pages 227-240, June.
    4. T. Gregory Morton, 1975. "A Discriminant Function Analysis of Residential Mortgage Delinquency and Foreclosure," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 3(1), pages 73-88.
    5. Kerry D. Vandell & Thomas Thibodeau, 1985. "Estimation of Mortgage Defaults Using Disaggregate Loan History Data," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 13(3), pages 292-316.
    6. Mills, Edwin S & Lubuele, Luan' Sende, 1994. "Performance of Residential Mortgages in Low- and Moderate-Income Neighborhoods," The Journal of Real Estate Finance and Economics, Springer, vol. 9(3), pages 245-260, November.
    7. Angrist, Joshua D, 2001. "Estimations of Limited Dependent Variable Models with Dummy Endogenous Regressors: Simple Strategies for Empirical Practice," Journal of Business & Economic Statistics, American Statistical Association, vol. 19(1), pages 2-16, January.
    8. Webb, Bruce G, 1982. " Borrower Risk under Alternative Mortgage Instruments," Journal of Finance, American Finance Association, vol. 37(1), pages 169-183, March.
    9. Stansell, Stanley R & Millar, James A, 1976. "An Empirical Study of Mortgage Payment to Income Ratios in a Variable Rate Mortgage Program," Journal of Finance, American Finance Association, vol. 31(2), pages 415-425, May.
    10. Edwin S. Mills & Luan Sende Lubuele, 1994. "Performance of residential mortgages in low- and moderate-income neighborhoods," Proceedings, Federal Reserve Bank of Philadelphia, pages 245-262.
    11. Francis Vella, 1998. "Estimating Models with Sample Selection Bias: A Survey," Journal of Human Resources, University of Wisconsin Press, vol. 33(1), pages 127-169.
    12. Robert B. Avery & Paul S. Calem & Glenn B. Canner, 2004. "Consumer credit scoring: do situational circumstances matter?," BIS Working Papers 146, Bank for International Settlements.
    13. Angrist, Joshua D, 2001. "Estimations of Limited Dependent Variable Models with Dummy Endogenous Regressors: Simple Strategies for Empirical Practice: Reply," Journal of Business & Economic Statistics, American Statistical Association, vol. 19(1), pages 27-28, January.
    14. Vandell, Kerry D, 1978. "Default Risk under Alternative Mortgage Instruments," Journal of Finance, American Finance Association, vol. 33(5), pages 1279-1296, December.
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    Cited by:

    1. Gastón Chaumont & Miguel Fuentes & Felipe Labbé & Alberto Naudón, 2011. "A Reassesment of Flexible Price Evidence Using Scanner Data: Evidence from an Emerging Economy," Working Papers Central Bank of Chile 632, Central Bank of Chile.
    2. Carlos Madeira, 2012. "Tasas de Crédito Ajustadas por Riesgo e Implicancias para Políticas de Tasa Máxima Convencional," Working Papers Central Bank of Chile 654, Central Bank of Chile.
    3. Sofía Bauducco & Gonzalo Castex, 2013. "The Wealth Distribution in Developing Economies: Comparing the United States to Chile," Working Papers Central Bank of Chile 702, Central Bank of Chile.
    4. Javier Gutiérrez Rueda & Dairo Estrada & Laura Capera, "undated". "Un análisis del endeudamiento de los hogares," Temas de Estabilidad Financiera 061, Banco de la Republica de Colombia.
    5. Sónia Costa, 2012. "Households’ Default Probability: An Analysis Based on the Results of the HFCS," Economic Bulletin and Financial Stability Report Articles, Banco de Portugal, Economics and Research Department.
    6. Diego Avanzini & Juan Francisco Martínez & Víctor Pérez, 2016. "A micro-powered model of mortgage default risk for full recourse economies, with an application to the case of Chile," IFC Bulletins chapters,in: Bank for International Settlements (ed.), Combining micro and macro data for financial stability analysis, volume 41 Bank for International Settlements.
    7. Andrés Sagner, 2011. "El Índice Cartera Vencida como Medida de Riesgo de Crédito: Análisis y Aplicación al Caso de Chile," Working Papers Central Bank of Chile 618, Central Bank of Chile.
    8. Felipe Martínez & Rodrigo Cifuentes & Carlos Madeira & Rubén Poblete-Cazenave, 2013. "Measurement of Household Financial Risk with the Survey of Household Finances," Working Papers Central Bank of Chile 682, Central Bank of Chile.
    9. Jaime Ruiz-Tagle & Leidy García & Álvaro Miranda, 2013. "Proceso de Endeudamiento y Sobre Endeudamiento de los Hogares en Chile," Working Papers Central Bank of Chile 703, Central Bank of Chile.

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