IDEAS home Printed from https://ideas.repec.org/p/cbi/ecolet/10-el-16.html
   My bibliography  Save this paper

Originating Loan to Value ratios and the resilience of mortgage portfolios

Author

Listed:
  • McCann, Fergal

    (Central Bank of Ireland)

  • Ryan, Ellen

    (Central Bank of Ireland)

Abstract

It is widely acknowledged that mortgage lending with lower Loan to Value (LTV) ratios is expected to have a lower probability of default, which will increase the resilience of a bank's mortgage portfolio to adverse events. This Letter focuses on another channel through which lower-LTV lending can lead to improvements in bank balance sheet resilience: the lowering of losses in the event of a default (Loss Given Liquidation, LGL). Using data from three major mortgage lenders in Ireland on loans for property purchase, we focus on originating LTVs on mortgages issued between 2003 and 2016 to make a number of observations on the evolution of mortgage portfolio resilience. Firstly, aggregate hypothetical losses experienced in the event of a common shock are at the lowest level since 2003 among the cohorts of loans issued since the introduction of recent Central Bank of Ireland mortgage market regulations. Secondly, the correlation between originating LTV and loan size has been falling steadily since 2006, reflecting a decreased tendency for banks to make their largest loans also their most highly leveraged, which leads directly to improvements in portfolio-level resilience. Finally, we show that improvements in the resilience of mortgages to adverse house price shocks are most pronounced at the right tail of the LTV distribution, where the highest-risk lending has reduced significantly over the 2008-2016 period.

Suggested Citation

  • McCann, Fergal & Ryan, Ellen, 2016. "Originating Loan to Value ratios and the resilience of mortgage portfolios," Economic Letters 10/EL/16, Central Bank of Ireland.
    • Handle: RePEc:cbi:ecolet:10/el/16
    as

    Download full text from publisher

    File URL: https://centralbank.ie/docs/default-source/publications/economic-letters/economic-letter-vol-2016-no-10.pdf?sfvrsn=6
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Kelly, Robert & O’Malley, Terence, 2016. "The good, the bad and the impaired: A credit risk model of the Irish mortgage market," Journal of Financial Stability, Elsevier, vol. 22(C), pages 1-9.
    2. Joyce, John & McCann, Fergal, 2016. "Model-based estimates of the resilience of mortgages at origination," Economic Letters 09/EL/16, Central Bank of Ireland.
    3. McCarthy, Yvonne, 2014. "Dis-entangling the mortgage arrears crisis: The rolw of the labour market, income volatility and housing equity," Research Technical Papers 02/RT/14, Central Bank of Ireland.
    4. Mark Cassidy & Niamh Hallissey, 2016. "The Introduction of Macroprudential Measures for the Irish Mortgage Market," The Economic and Social Review, Economic and Social Studies, vol. 47(2), pages 271-297.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Gaffney, Edward & McCann, Fergal, 2019. "The cyclicality in SICR: mortgage modelling under IFRS 9," ESRB Working Paper Series 92, European Systemic Risk Board.
    2. Donnery, Sharon & Fitzpatrick, Trevor & Greaney, Darren & McCann, Fergal & O'Keeffe, Micheal, 2018. "Resolving Non-Performing Loans in Ireland: 2010-2018," Quarterly Bulletin Articles, Central Bank of Ireland, pages 54-70, April.
    3. McCann, Fergal, 2017. "Resolving a Non-Performing Loan crisis: The ongoing case of the Irish mortgage market," Research Technical Papers 10/RT/17, Central Bank of Ireland.
    4. O’Toole, Conor & Slaymaker, Rachel, 2021. "Repayment capacity, debt service ratios and mortgage default: An exploration in crisis and non-crisis periods," Journal of Banking & Finance, Elsevier, vol. 133(C).
    5. 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.
    6. Tsiropoulos, Vasilis, 2018. "A Vulnerability Analysis for Mortgaged Irish Households," Financial Stability Notes 02-18, Central Bank of Ireland.
    7. O'Toole, Conor & Slaymaker, Rachel, 2020. "Review of the Rebuilding Ireland Home Loan scheme," Research Series, Economic and Social Research Institute (ESRI), number RS104.
    8. David Byrne & Robert Kelly & Conor O'Toole, 2022. "How Does Monetary Policy Pass‐Through Affect Mortgage Default? Evidence from the Irish Mortgage Market," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 54(7), pages 2081-2101, October.
    9. International Monetary Fund, 2016. "Ireland: Financial Sector Assessment Program: Technical Note-Nonbank Sector Stability Analyses," IMF Staff Country Reports 2016/317, International Monetary Fund.
    10. Gaffney, Edward & McCann, Fergal, 2018. "The cyclicality in SICR: mortgage modelling under IFRS 9," Research Technical Papers 16/RT/18, Central Bank of Ireland.
    11. Slaymaker, Rachel & O'Toole, Conor & McQuinn, Kieran & Fahy, Mike, 2018. "Monetary policy normalisation and mortgage arrears in a recovering economy: The case of the Irish residential market," Papers WP613, Economic and Social Research Institute (ESRI).
    12. McCann, Fergal, 2014. "Modelling default transitions in the UK mortgage market," Research Technical Papers 18/RT/14, Central Bank of Ireland.
    13. Tsiropoulos, Vasilis, 2018. "A Vulnerability Analysis for Mortgaged Irish Households," Financial Stability Notes 2/FS/18, Central Bank of Ireland.
    14. Kelly, Jane & Mazza, Elena, 2019. "Mortgage servicing burdens and LTI caps," Financial Stability Notes 13/FS/19, Central Bank of Ireland.
    15. Kelly, Jane & Mazza, Elena, 2019. "Mortgage Repayment Affordability across the Income Distribution," Financial Stability Notes 15/FS/19, Central Bank of Ireland.
    16. 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.
    17. Richard Waldron & Declan Redmond, 2016. "Stress in Suburbia: Counting the Costs of Ireland's Property Crash and Mortgage Arrears Crisis," Tijdschrift voor Economische en Sociale Geografie, Royal Dutch Geographical Society KNAG, vol. 107(4), pages 484-501, September.
    18. Kelly, Robert & O'Toole, Conor, 2016. "Lending Conditions and Loan Default: What Can We Learn From UK Buy-to-Let Loans?," Research Technical Papers 04/RT/16, Central Bank of Ireland.
    19. Lozej, Matija & Rannenberg, Ansgar, 2017. "The macroeconomic effects of the regulatory LTV and LTI ratios in the Central Bank of Ireland's DSGE model," Economic Letters 04/EL/17, Central Bank of Ireland.
    20. 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.

    More about this item

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:cbi:ecolet:10/el/16. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Fiona Farrelly (email available below). General contact details of provider: https://edirc.repec.org/data/cbigvie.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.