Strategic, unaffordability and dual-trigger default in the Irish mortgage market

Abstract

a b s t r a c tA mortgage holder whose property is worth less than the repayment value of the mortgage may decide to strategically default, i.e., renege on the cash flow liability of the mortgage loan and surrender the property to the mortgage issuer. In other circumstances a mortgage holder may default due to personal income decline which makes payment infeasible (unaffordability default) or for a combination of strategic and affordability causes (dual-trigger default). This paper utilizes a database of troubled Irish mortgages to model the default decisions of Irish mortgage holders. We include both affordabilityrelated and strategic-related explanatory variables. We find that both types of explanatory variables play a role in the explosive growth in Irish mortgage default after the Irish banking crisis and temporary legal prohibition of property repossession. We find that a dual-trigger model of default best fits the Irish data. Given the unusual features of the Irish market, our findings both complement and strengthen existing empirical findings from other national mortgage markets.

“We’re just existing, not living!” Mortgage stress and the concealed costs of coping with crisis

“…While the macro-economic impacts of the financial crisis are increasingly understood, there has been less focus on how households have experienced and responded to mortgage difficulties arising from the financial crisis (Hall, 2015, Murphy and Scott, 2014a, Wallace et al, 2014. Mainstream economic accounts understand mortgage default within an option theory framework, whereby a mortgagor pays down debt and avoids default as long as income flows are sufficient to meet payments without undue financial burden (Connor and Flavin, 2015). However, if the value of the property falls below the value of the outstanding mortgage, the household has negative net equity invested in the property and the mortgagor may strategically opt to default on the loan; albeit this decision is influenced by reputational costs, ethical considerations and the legal/ regulatory context (Guiso et al, 2009).…”

What are the triggers for arrears on debt over a business cycle? Evidence from panel data

“…Kelly and O'Malley (2016) find that labour market deterioration played a bigger role than negative equity in the increase in defaults in Ireland. Connor and Flavin (2015) use an Irish cross-sectional sample of troubled mortgage accounts and find that in the sample the loan-to-value ratio, the debt service ratio and negative income increase the probability of default. Mocetti and Viviano (2014) is the only study in Europe that uses panel data.…”

Risks in homeownership: a perspective on The Netherlands

“…Neuteboom, 2008;Kim, 2015;Chan et. al., 2015;Connor and Flavin, 2015;Nield, 2015). In other words, default is an outcome of a thoughtful reflection in the sense that if mortgage repayment were to be continuing, it would be mainly due to the anticipated profit.…”

“…There are two distinct hypothesis underlying mortgage default which according to many (Lambrecht et al , 1997; Yang et al , 1998; Neuteboom, 2008) are the equity and ability to pay hypotheses. Homeowners default on the basis of comparison between the costs and returns inherent in the continuation or termination of a mortgage contract (Neuteboom, 2008; Kim, 2015; Chan et al , 2015; Connor and Flavin, 2015; Nield, 2015). In other words, default is an outcome of a thoughtful reflection in the sense that if mortgage repayment were to be continuing, it would be mainly due to the anticipated profit.…”