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The Triple Trigger? Negative Equity, Income Shocks and Institutions as Determinants of Mortgage Default

Author

Listed:
  • Andrew Lynn

    (Bank of England)

  • Ronan C Lyons

    () (Trinity College Dublin)

Abstract

In understanding the determinants of mortgage default, the consensus has moved from an 'option theory' model to the 'double trigger' hypothesis. Nonetheless, that consensus is based on within-country studies of default. This paper examines the determinants of mortgage default across five European countries, using a large dataset of over 2.3 million active mortgage loans originated between 1991 and 2013 across over 150 banks. The analysis finds support for the double trigger hypothesis: changes in unemployment are important determinants of default, while negative equity itself is a relatively small contributor to default. Nonetheless, the effect of variables such as the interest rate and unemployment is stronger for those in negative equity. The double trigger, however, varies by country: country-specific factors are found to have a large effect on default rates. For any given level of LTV, and as LTV changes, borrowers were more sensitive to the interest rate and unemployment in Ireland and Portugal than in the UK or the Netherlands.

Suggested Citation

  • Andrew Lynn & Ronan C Lyons, 2018. "The Triple Trigger? Negative Equity, Income Shocks and Institutions as Determinants of Mortgage Default," Trinity Economics Papers tep0718, Trinity College Dublin, Department of Economics.
  • Handle: RePEc:tcd:tcduee:tep0718
    as

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    File URL: https://www.tcd.ie/Economics/TEP/2018/TEP0718.pdf
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    References listed on IDEAS

    as
    1. Kroot, Jan & Giouvris, Evangelos, 2016. "Dutch mortgages: Impact of the crisis on probability of default," Finance Research Letters, Elsevier, vol. 18(C), pages 205-217.
    2. Gerardi, Kristopher & Herkenhoff, Kyle F. & Ohanian, Lee E. & Willen, Paul S., 2013. "Can't Pay or Won't Pay? Unemployment, Negative Equity, and Strategic Default," FRB Atlanta Working Paper 2013-04, Federal Reserve Bank of Atlanta, revised 01 Jun 2017.
    3. repec:hrv:faseco:30758219 is not listed on IDEAS
    4. Aron, Janine & Muellbauer, John, 2011. "Modelling and forecasting with county court data: regional mortgage possession claims and orders in England and Wales," LSE Research Online Documents on Economics 33580, London School of Economics and Political Science, LSE Library.
    5. Lambrecht, Bart M & Perraudin, William R M & Satchell, Steven, 2003. " Mortgage Default and Possession under Recourse: A Competing Hazards Approach," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 35(3), pages 425-442, June.
    6. Sónia Costa, 2012. "Households’ Default Probability: An Analysis Based on the Results of the HFCS," Economic Bulletin and Financial Stability Report Articles and Banco de Portugal Economic Studies, Banco de Portugal, Economics and Research Department.
    7. 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.
    8. Kelly, Robert & O'Malley, Terence & O'Toole, Conor, 2015. "Designing Macro-prudential Policy in Mortgage Lending: Do First Time Buyers Default Less?," Research Technical Papers 02/RT/15, Central Bank of Ireland.
    9. Kelly, Robert & McCann, Fergal, 2016. "Some defaults are deeper than others: Understanding long-term mortgage arrears," Journal of Banking & Finance, Elsevier, vol. 72(C), pages 15-27.
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    More about this item

    Keywords

    mortgage default; negative equity; double trigger; European Union.;

    JEL classification:

    • G01 - Financial Economics - - General - - - Financial Crises
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • D04 - Microeconomics - - General - - - Microeconomic Policy: Formulation; Implementation; Evaluation
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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