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Some defaults are deeper than others: Understanding long-term mortgage arrears

Author

Listed:
  • Kelly, Robert

    (Central Bank of Ireland)

  • McCann, Fergal

    (Central Bank of Ireland)

Abstract

The 2007-2008 financial crisis yielded a significant number of delinquent mortgage loans, which ordinarily would have faced foreclosure and repossession. However, given the negative externalities of repossession, policy response has shifted towards forbearance and mortgage modification, which has led to longer spells in default for delinquent mortgage holders. It is therefore imperative to move beyond binary models of default towards an understanding of the factors that drive the depth of default spells. Exploiting a highly detailed dataset on financially distressed households in Ireland in 2012 and 2013, we are able to identify the impact of a range of current household-level information, generally not available in loan-level studies of mortgage default, on the probability of entering early and deep states of mortgage default. Our results suggest that high loan-to-value ratios, consumer credit growth, shocks to mortgage affordability and unemployment should all trigger serious concerns among policy makers regarding subsequent stability in the mortgage market, with these measures all shown to have differentially large impacts on entry to deep, relative to early-stage arrears.

Suggested Citation

  • Kelly, Robert & McCann, Fergal, 2015. "Some defaults are deeper than others: Understanding long-term mortgage arrears," Research Technical Papers 05/RT/15, Central Bank of Ireland.
    • Handle: RePEc:cbi:wpaper:05/rt/15
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    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.
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    Citations

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    Cited by:

    1. Kelly, Jane & Mazza, Elena, 2019. "Mortgage servicing burdens and LTI caps," Financial Stability Notes 13/FS/19, Central Bank of Ireland.
    2. McCann, Fergal & McGeever, Niall, 2018. "Cures and Exits: the drivers of NPL resolution in Ireland from 2012 to 2017," Financial Stability Notes 6/FS/18, Central Bank of Ireland.
    3. Yosi Borochov & Boris A. Portnov, 2021. "Estimating Environmentally Adjusted Risks of Mortgage Arrears for Different Socioeconomic Groups of Borrowers," European Research Studies Journal, European Research Studies Journal, vol. 0(2), pages 595-620.
    4. 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.
    5. Alin Marius Andries & Anca Copaciu & Radu Popa & Razvan Vlahu, 2021. "Recourse and (strategic) mortgage defaults: Evidence from changes in housing market laws," Working Papers 727, DNB.
    6. McCann, Fergal & O'Malley, Terry, 2020. "Resolving mortgage distress after COVID-19: some lessons from the last crisis," Financial Stability Notes 7/FS/20, Central Bank of Ireland.
    7. Kelly, Robert & McCann, Fergal, 2015. "Households in long-term mortgage arrears:lessons from economic research," Economic Letters 11/EL/15, Central Bank of Ireland.
    8. McCann, Fergal, 2017. "Borrower-lender engagement during the Irish mortgage arrears crisis," Economic Letters 17/EL/17, Central Bank of Ireland.
    9. Byrne, David & McCann, Fergal & Gaffney, Edward, 2023. "The interest rate exposure of mortgaged Irish households," Financial Stability Notes 2/FS/23, Central Bank of Ireland.
    10. Andrew Linn & Ronan C. Lyons, 2020. "Three Triggers? Negative Equity, Income Shocks and Institutions as Determinants of Mortgage Default," The Journal of Real Estate Finance and Economics, Springer, vol. 61(4), pages 549-575, November.
    11. McInerney, Niall, 2019. "Macroprudential Policy, Banking and the Real Estate Sector," MPRA Paper 91777, University Library of Munich, Germany.
    12. Arno Botha & Conrad Beyers & Pieter de Villiers, 2019. "A procedure for loss-optimising default definitions across simulated credit risk scenarios," Papers 1907.12615, arXiv.org, revised Feb 2021.
    13. Damian S. Damianov & Xiangdong Wang & Cheng Yan, 2021. "Google Search Queries, Foreclosures, and House Prices," The Journal of Real Estate Finance and Economics, Springer, vol. 63(2), pages 177-209, August.
    14. Arno Botha & Conrad Beyers & Pieter de Villiers, 2020. "Simulation-based optimisation of the timing of loan recovery across different portfolios," Papers 2009.11064, arXiv.org, revised Apr 2021.
    15. Andrew Linn & 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.
    16. Shaikh, Sameer & Kilgarriff, Paul & Gaffney, Edward, 2023. "Exploring missed mortgage payments in the first year of monetary tightening," Financial Stability Notes 9/FS/23, Central Bank of Ireland.
    17. McCann, Fergal & McGeever, Niall, 2018. "Cures and Exits: the drivers of NPL resolution in Ireland from 2012 to 2017," Financial Stability Notes 06-18, Central Bank of Ireland.
    18. Wilfred K. Anim-Odame & Precious Angelo Brenni & Damian Damianov & Dennis Philip, 2018. "Residential Occupancy and Property Tax Default," ERES eres2018_214, European Real Estate Society (ERES).
    19. Danne, Christian & McGuinness, Anne, 2016. "Mortgage modifications and loan performance," Research Technical Papers 05/RT/16, Central Bank of Ireland.

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    More about this item

    Keywords

    Mortgages; default; days past due; affordability.;
    All these keywords.

    JEL classification:

    • D14 - Microeconomics - - Household Behavior - - - Household Saving; Personal Finance
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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