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Determinants and consequences of mortgage default

Author

Listed:
  • Yuliya Demyanyk
  • Ralph S. J. Koijen
  • Otto Van Hemert

Abstract

We study a unique data set of borrower-level credit information from TransUnion, one of the three major credit bureaus, which is linked to a database containing detailed information on the borrowers’ mortgages. We find that the updated credit score is an important predictor of mortgage default in addition to the credit score at origination. However, the 6-month change in the credit score also predicts default: A positive change in the credit score significantly reduces the probability of delinquency or foreclosure. Next, we analyze the consequences of default on a borrower’s credit score. The credit score drops on average 51 points when a borrower becomes 30-days delinquent on his mortgage, but the effect is much more muted for transitions to more severe delinquency states and even foreclosure.

Suggested Citation

  • Yuliya Demyanyk & Ralph S. J. Koijen & Otto Van Hemert, 2010. "Determinants and consequences of mortgage default," Working Paper 1019, Federal Reserve Bank of Cleveland.
  • Handle: RePEc:fip:fedcwp:1019
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    Cited by:

    1. Daniel Rösch & Harald Scheule, 2011. "Securitization rating performance and agency incentives," BIS Papers chapters,in: Bank for International Settlements (ed.), Portfolio and risk management for central banks and sovereign wealth funds, volume 58, pages 287-314 Bank for International Settlements.
    2. Guiso, Luigi & Sodini, Paolo, 2013. "Household Finance: An Emerging Field," Handbook of the Economics of Finance, Elsevier.
    3. John Y. Campbell & João F. Cocco, 2015. "A Model of Mortgage Default," Journal of Finance, American Finance Association, vol. 70(4), pages 1495-1554, August.
    4. Irina Stanga & Razvan Vlahu & Jakob de Haan, 2017. "Mortgage arrears, regulation and institutions: Cross-country evidence," DNB Working Papers 580, Netherlands Central Bank, Research Department.

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