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The determinants of the loss given default of residential mortgage loans in Portugal

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  • Márcio Mateus

Abstract

In this paper we investigate the determinants of the loss given default (LGD) of mortgage loans in Portugal. Exploring loan-level data from the Portuguese Central Credit Register, we show that the original LTV (oLTV) ratio is by far the most important determinant of the LGD of mortgage loans, but the relation between these two variables is not linear. A higher oLTV ratio is associated with a higher LGD of mortgage loans, but only above a certain threshold. We provide evidence that the critical area in the relationship between these two variables lies in a range between 80% and 100%. Our results also highlight the importance of the house price cycle history in explaining the LGD, with distinct short and long-term effects. In the short-term we find a negative correlation between house prices and LGD, meaning that a house price increase just before loan origination seems to contribute to the decrease of the LGD in the future. In the long-term the correlation is positive, which suggests that the higher the house price has increased in the past, the higher the future LGD is expected to be.

Suggested Citation

  • Márcio Mateus, 2023. "The determinants of the loss given default of residential mortgage loans in Portugal," Working Papers w202318, Banco de Portugal, Economics and Research Department.
    • Handle: RePEc:ptu:wpaper:w202318
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    1. Dennis R. Capozza & Patric H. Hendershott & Charlotte Mack, 2004. "An Anatomy of Price Dynamics in Illiquid Markets: Analysis and Evidence from Local Housing Markets," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 32(1), pages 1-32, March.
    2. Gross, Marco & Población, Javier, 2017. "Assessing the efficacy of borrower-based macroprudential policy using an integrated micro-macro model for European households," Economic Modelling, Elsevier, vol. 61(C), pages 510-528.
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