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Residual Mortgage Debt, Insurance, and Defaults in the Netherlands

Author

Listed:
  • Madi Mangan
  • Mauro Mastrogiacomo
  • Hans Bloemen

Abstract

Mortgage defaults are commonly linked to affordability and borrowers’ income; less often, to a decrease in home value. However, some studies talk about “strategic defaults†, a form of moral hazard whereby people who can afford their underwater mortgage choose not to pay. In this way, they clear their excess debt, as single recourse systems act as insurance. Our focus is on a type of mortgage insurance, available for houses with values below a certain threshold, that varies over time. We examine how this mortgage insurance affects decisions to default. We combine a quasi-natural experiment with the estimation of a structural model, more precisely an optimal stopping model. Our findings reveal that the (utility from) future value of home equity negatively influences the likelihood of default. We show that the discontinuity around the qualification threshold is linked to borrowers’ income, due to loan-to-income caps. The model indicates that while the insurance does not cause defaults in general, it does lead to more defaults for borrowers who separate from their partners, possibly indicating moral hazard.

Suggested Citation

  • Madi Mangan & Mauro Mastrogiacomo & Hans Bloemen, 2024. "Residual Mortgage Debt, Insurance, and Defaults in the Netherlands," Working Papers 824, DNB.
    • Handle: RePEc:dnb:dnbwpp:824
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    File URL: https://www.dnb.nl/media/pmmnmkaf/working_paper_no-824.pdf
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    References listed on IDEAS

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    4. Luigi Guiso & Paola Sapienza & Luigi Zingales, 2013. "The Determinants of Attitudes toward Strategic Default on Mortgages," Journal of Finance, American Finance Association, vol. 68(4), pages 1473-1515, August.
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    6. Yeorim Kim & Mauro Mastrogiacomo & Stefan Hochguertel & Hans Bloemen, 2022. "Till debt do us part: strategic divorces and a test of moral hazard," Tinbergen Institute Discussion Papers 22-048/V, Tinbergen Institute.
    7. Raj Chetty, 2008. "Erratum: Moral Hazard versus Liquidity and Optimal Unemployment Insurance," Journal of Political Economy, University of Chicago Press, vol. 116(6), pages 1197-1197, December.
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    More about this item

    Keywords

    Residual Mortgage Insurance; Non-performance; Structural model; quasi-natural experiment;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G52 - Financial Economics - - Household Finance - - - Insurance

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