Liquidity Constraints, Home Equity and Residential Mortgage Losses

Xuan, Hung; Rösch, Daniel; Scheule, Harald

doi:10.1007/s11146-019-09709-9

Cited by 4 publications

(5 citation statements)

References 39 publications

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“…The applicability of the “equity theory of default” (Elul et al , 2010; Quercia et al , 2011; Lydon and McCarthy, 2013; Collins et al , 2015; Fuster and Willen, 2017; Bergmann, 2020; Do et al , 2020) remained unexplored in the present study. Future studies in the Malaysian housing finance market may also explore “strategic default” (Ghent and Kudlyak, 2011; Trautmann and Vlahu, 2013; Seiler, 2015; Hall and Maingi, 2021) and the effect of borrowers’ characteristics, personality traits and self-control of Malaysian housing loan borrowers in the mortgage decision-making process (Gambetti and Giusberti, 2017; Sekścińska and Markiewicz, 2020; Schlafmann, 2021).…”

Section: Conclusion Discussion and Policy Implicationsmentioning

confidence: 84%

Housing loan default in Malaysia: an analytical insight and policy implications

Saha

Lim

Yeok

2022

IJHMA

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Purpose The purpose of this paper is to examine the drivers of default in the Malaysian housing market in the light of various policy interventions by the country’s central bank, and the government’s expressed concern to ensure balanced growth in the market. This paper assesses the importance of considering the endogeneity of loan-to-value (LTV) in predicting housing loan default and its implications. Design/methodology/approach In this paper, the author addresses the endogeneity problem in the LTV variable using two instrumental variables (IV) in this probit regression: national residential property gains tax and the statutory reserve ratio of Bank Negara Malaysia. This study uses the instrumental variable probit model to consider endogeneity bias. This study assumes a latent (unobservable) variable (Y*), representing a borrower’s tendency to default, which is associated linearly with the borrower’s and loan characteristics and other variables (Xi). This study uses individual borrower-level information of 43,156 housing loan borrowers from the files of a well-established housing bank in Malaysia. Findings This study’s results confirm that endogeneity causes a substantial difference in the magnitude of the estimated effects of LTV on the default tendency. At the lower values of LTV, the probability of default is over-estimated, and at the higher values, the default probability is substantially underestimated. Endogeneity bias also affects the estimated coefficients of loan and borrower characteristics. The authors find that the interest rate is less relevant in predicting loan default. Other loan characteristics, such as loan age, tenure, payment amount and the built-up area, are relevant. This study’s result confirms that the borrower’s location matters, and an increase in state gross domestic product per capita and an increase in the supply of residential units reduce default probability. Research limitations/implications The present study did not explore the applicability of the “equity theory of default” in the Malaysian housing market. This study did not assess “strategic default” issues and the effect of borrowers’ characteristics, personality traits and self-control of Malaysian housing loan borrowers in the mortgage decision-making process. The evolving dynamics of the Malaysian housing market microstructure in property valuation remained unexplored in the present study. Practical implications The findings have crucial relevance in the decision-making process of commercial banks, the central bank and the government to frame policies to foster balanced growth and development in the housing market. The authors argue that striking a subtle balance between the concerns of financial stability and productive risk-taking by commercial banks in Malaysia remains a continuing challenge for the country’s central bank. The authors also argue that designing suitable taxation policies by the government can deliver its cherished goal of balanced development in the housing market. Originality/value Empirical research on the Malaysian housing market based on micro-level data is scarce due to a paucity of relevant data. This study is based on the individual borrower-level information of 43,156 housing loan borrowers from the files of a well-established housing bank in Malaysia. In this analysis, the authors find clear evidence of endogeneity in LTV and argue that any attempts to decipher the default drivers of housing loans without addressing the issue of endogeneity may lead to faulty interpretation. Therefore, this study is unique in recognizing endogeneity and has gone deeper in identifying the default drivers in the Malaysian housing market not addressed by earlier papers.

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Section: Conclusion Discussion and Policy Implicationsmentioning

confidence: 84%

Housing loan default in Malaysia: an analytical insight and policy implications

Saha

Lim

Yeok

2022

IJHMA

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“…They estimate a multinomial logit for whether borrowers in arrears go on to foreclose or to cure. Do, Rösch and Scheule (2020) examine the dollar value of losses given that loans have defaulted; they find that borrower liquidity constraints and negative equity affect whether loans cure and negative equity also increases the dollar value of losses.…”

Section: What Can Previous Research Tell Us?mentioning

confidence: 99%

The Determinants of Mortgage Defaults in Australia – Evidence for the Double-trigger Hypothesis

Bergmann¹

2020

RBA Research Discussion Papers

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I explore the determinants of mortgage defaults in Australia. Specifically, I use a novel two-stage hazard model to examine evidence for the 'double-trigger' hypothesis – that defaults require both an inability to repay the loan and the loan to be in negative equity. My results are broadly consistent with the double-trigger hypothesis. Ability-to-pay factors, such as regional unemployment rates and borrowers' repayment-to-income ratios, are found to be correlated with loans entering arrears. Transitions from arrears to foreclosure, on the other hand, are more closely linked to the extent of negative equity.

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“…, 2011; Lydon and McCurthy, 2013; Collins et al. , 2015; Bergmann, 2020; Ganong and Noel, 2020; Do et al. , 2020) is undoubtedly a potential area of research in the arena of housing loan default in India.…”

Section: Discussionmentioning

confidence: 99%

“…, 2019; Linn and Lyons, 2020; Ganong and Noel, 2020; DeFusco et al. , 2020; Do et al ., 2020; Ono et al. , 2021).…”

Section: Literature Reviewmentioning

confidence: 99%

“…There is an extensive body of literature addressing the drivers of default in housing loans (Campbell and Dietrich, 1983;Hakim and Haddad, 1999;Deng et al, 2000;Kelly, 2008;Kau et al, 2011;Ghent and Kudlyak, 2011;Goodman and Smith, 2010;Campbell and Cocco, 2015;Jones and Sirmans, 2015;Laufer, 2018;Gupta, 2019;Cloyne et al, 2019;Linn and Lyons, 2020;DeFusco et al, 2020;Do et al, 2020;Ono et al, 2021). Campbell and Dietrich (1983) report that the coefficient of the dummy variable representing the LTV ratio is significant and consistently negative.…”

Section: Literature Reviewmentioning

confidence: 99%

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Loan to value ratio and housing loan default – evidence from microdata in India

Saha

Rooj

Sengupta

2022

IJOEM

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PurposeThis study aims to investigate the factors that drive housing loan default in India based on unique micro-level data drawn from a public sector bank's credit files with a national presence in India. The authors address endogeneity in the loan to value ratio (LTV) while deciphering the drivers of default.Design/methodology/approachThe study uses a probit regression approach to analyze the relationship between the probability of default and the explanatory variables. The authors introduce two instrumental variables to address the issue of endogeneity. The authors also add state-level demographic and several other control variables, including an indicator variable that captures the recent regulatory change. The authors’ analysis is based on 102,327 housing loans originated by the bank between January 2001 and December 2017.FindingsThe authors find that addressing the endogeneity issue is essential to specify default drivers, especially LTV, correctly. The nature of employment, gender, socio-religious category and age have a distinct bearing on housing loan defaults. Apart from the LTV ratio, the other key determinants of default are the interest rate, frequency of repayment, prepayment options and the loan period. The findings suggest that the population classification of branch location plays a significant role in loan default. The authors find that an increase in per capita income and an increase in the number of employed people in the state, which reflects borrowers' ability to pay by borrowers, reduce the probability of default. The change in the regulatory classification of loan assets by the Reserve Bank of India did not bear the main results.Research limitations/implicationsThe non-availability of the house price index in analyzing the default dynamics in the Indian housing finance market for the period covered under the study has constrained our analysis. The applicability of the equity theory of default, strategic default, borrowers' characteristics and personality traits are potential research areas in the Indian housing finance market.Practical implicationsThe study's findings are expected to provide valuable inputs to the banks and the housing finance companies to explore and formulate appropriate strategic options in lending to this sector. It has highlighted various vistas of tailor-making housing loan product offerings by the commercial banks to ensure and steady and healthy growth of their loan portfolio. It has also highlighted the regulatory and policy underpinnings to ensure the healthy growth of the Indian housing finance market.Originality/valueThe study provides a fresh perspective on the default drivers in the Indian housing finance market based on micro-level data. In our analysis, the authors find clear evidence of endogeneity in LTV and argue that any attempts to decipher the default drivers of housing loans without addressing the issue of endogeneity may lead to faulty interpretation. Therefore, this study is unique in recognizing endogeneity and has gone deeper in identifying the default drivers in the Indian housing market not addressed by earlier papers on the Indian housing market. The authors also control for the regulatory changes in the Indian housing finance market and include state-level control variables like per capita GDP and the number of workers per thousand to capture the borrowers' ability to pay characteristics.

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Liquidity Constraints, Home Equity and Residential Mortgage Losses

Cited by 4 publications

References 39 publications

Housing loan default in Malaysia: an analytical insight and policy implications

Housing loan default in Malaysia: an analytical insight and policy implications

The Determinants of Mortgage Defaults in Australia – Evidence for the Double-trigger Hypothesis

Loan to value ratio and housing loan default – evidence from microdata in India

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