Loriana Pelizzon (Universita Ca Foscari Venice and SAFE-Goethe University Frankfurt)

"Residential mortgage defaults and positive equity: Lessons from Europe"

23 October 2018, 12:00 pm

abstract

We empirically investigate mortgage default behavior in the European market where mortgages are recourse loans, i.e. borrowers are responsible upon default for the difference between the value of the outstanding debt and the value of the house. We show that the majority of defaults happen when collateral would be in principle enough to repay the debt. We find that equity at default is significantly negatively related with the households income at origination, which is consistent with the threat of recoursability being greater for borrowers with a higher marginal utility of consumption. Moreover, a tightening in credit conditions reinforces the relation between equity at default and income and negative shocks to house prices have a larger impact on the default probability of low-income borrowers, everything else controlled for. This evidence poses the question on what is best between principal reduction or temporary payment moratorium to prevent borrowers from losing their homes during crisis periods.