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Irish Mortgage Default Optionality

  • Gregory Connor

    ()

    (Department of Economics Finance and Accounting, National University of Ireland, Maynooth)

  • Thomas Flavin

    ()

    (Department of Economics Finance and Accounting, National University of Ireland, Maynooth)

The owner of a residential property subject to a nonrecourse mortgage essentially has a put option against the market value of the property. If the market price of the property falls sufficiently, the owner can surrender the property to the mortgage issuer and in exchange receive full offset of the cashfl?ow liability of the mortgage loan. A similar but diluted put optionality holds for recourse mortgages if there are legal or practical limits to the mortgage issuer?s recourse claim against the owner?s future income. Previous research based on American data fi?nds that put optionality is an important, but not exclusive, determinant of mortgage default. This paper utilizes a database of troubled Irish mortgages to analyze the infl?uence of put optionality on Irish property owners' ?default behaviour. We fi?nd that put optionality is a very important explanatory variable for observed Irish mortgage defaults, complementing and strengthening existing empirical fi?ndings from US mortgage markets.

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Paper provided by Department of Economics, Finance and Accounting, National University of Ireland - Maynooth in its series Economics, Finance and Accounting Department Working Paper Series with number n243-13.pdf.

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Length: 43 pages
Date of creation: 2013
Date of revision:
Handle: RePEc:may:mayecw:n243-13.pdf
Contact details of provider: Postal: Maynooth, Co. Kildare
Phone: 353-1-7083728
Fax: 353-1-7083934
Web page: http://www.maynoothuniversity.ie/economics-finance-and-accounting

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  1. Deng, Yongheng & Quigley, John M. & Van Order, Robert, 1999. "Mortgage Terminations, Heterogeneity, and the Exercise of Mortgage Options," Berkeley Program on Housing and Urban Policy, Working Paper Series qt96r560pg, Berkeley Program on Housing and Urban Policy.
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  6. James F. Epperson & James B. Kau & Donald C. Keenan & Walter J. Muller, 1985. "Pricing Default Risk in Mortgages," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 13(3), pages 261-272.
  7. Giuseppe De Luca, 2008. "SNP and SML estimation of univariate and bivariate binary-choice models," Stata Journal, StataCorp LP, vol. 8(2), pages 190-220, June.
  8. Ronel Elul & Nicholas S. Souleles & Souphala Chomsisengphet & Dennis & Glennon & Robert Hunt, 2010. "What "triggers" mortgage default?," Working Papers 10-13, Federal Reserve Bank of Philadelphia.
  9. Reamonn Lyndon & Yvonne McCarthy, 2013. "What Lies Beneath? Understanding Recent Trends in Irish Mortgage Arrears," The Economic and Social Review, Economic and Social Studies, vol. 44(1), pages 117–150.
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