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Late payments on mortgage loans and unemployment: Evidence from a German household panel

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  • Möhlmann, Axel
  • Vogel, Edgar

Abstract

This paper empirically analyses the effect of unemployment on mortgage loan late payments using German household panel data. Regressions with individual fixed effects suggest that for each person who becomes unemployed, the probability of missing a mortgage payment increases by two percentage points. The effect intensifies with the length of unemployment. When examining the interaction between mortgage late payments and households' debt service, we find that higher borrower-based risk amplifies the effect of unemployment. Crucially, the effect is non-linear. The odds of individuals who have lost their jobs making a late mortgage payment increases disproportionately for those with a debt service ratio of 30% to 40% of their income. This implies that capping debt service to income ratios can reduce the risk of mortgage defaults and buffer against labour market shocks, which is relevant for financial stability analysis and macroprudential regulation.

Suggested Citation

  • Möhlmann, Axel & Vogel, Edgar, 2024. "Late payments on mortgage loans and unemployment: Evidence from a German household panel," Technical Papers 07/2024, Deutsche Bundesbank.
    • Handle: RePEc:zbw:bubtps:308093
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    More about this item

    Keywords

    Mortgage loans; default; unemployment; DSTI; macroprudential policy; financial stability;
    All these keywords.

    JEL classification:

    • D14 - Microeconomics - - Household Behavior - - - Household Saving; Personal Finance
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation
    • G51 - Financial Economics - - Household Finance - - - Household Savings, Borrowing, Debt, and Wealth
    • J63 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Turnover; Vacancies; Layoffs
    • L85 - Industrial Organization - - Industry Studies: Services - - - Real Estate Services

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