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What Drives Mortgage Default Risk in Europe and the U.S.?

Author

Listed:
  • Mr. Marco Gross
  • Mr. Thierry Tressel
  • Xiaodan Ding
  • Eugen Tereanu

Abstract

We present an analysis of the sensitivity of household mortgage probabilities of default (PDs) and loss given default (LGDs) on unemployment rates, house price growth, interest rates, and other drivers. A structural micro-macro simulation model is used to that end. It is anchored in the balance sheets and income-expense flow data from about 95,000 households and 230,000 household members from 21 EU countries and the U.S. We present country-specific nonlinear regressions based on the structural model simulation-implied relation between PDs and LGDs and their drivers. These can be used for macro scenario-conditional forecasting, without requiring the conduct of the micro simulation. We also present a policy counterfactual analysis of the responsiveness of mortgage PDs, LGDs, and bank capitalization conditional on adverse scenarios related to the COVID-19 pandemic across all countries. The economics of debt moratoria and guarantees are discussed against the background of the model-based analysis.

Suggested Citation

  • Mr. Marco Gross & Mr. Thierry Tressel & Xiaodan Ding & Eugen Tereanu, 2022. "What Drives Mortgage Default Risk in Europe and the U.S.?," IMF Working Papers 2022/065, International Monetary Fund.
    • Handle: RePEc:imf:imfwpa:2022/065
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    Cited by:

    1. Giannoulakis, Stelios & Forletta, Marco & Gross, Marco & Tereanu, Eugen, 2023. "The effectiveness of borrower-based macroprudential policies: a cross-country analysis using an integrated micro-macro simulation model," Working Paper Series 2795, European Central Bank.
    2. Billio, Monica & Dufour, Alfonso & Segato, Samuele & Varotto, Simone, 2023. "Complexity and the default risk of mortgage-backed securities," Journal of Banking & Finance, Elsevier, vol. 155(C).

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