Default Risk of Mortgage Credits for Lenders

Abstract

This paper applies a conditional copula model to investigate the dependence structure of house prices and default rates by analyzing their extreme dependence in order to quantify the default risk of mortgage credits for lenders. Therefore, we use housing supply factors and economic factors as well as interest rates and mortgage loan-to-price ratios as explaining variables. Examining quarterly data from 1985 to 2015 we find that new housing units starts, the existing mortgage loan-to-price ratio as well as the home mortgage loan-to-price ratio can be used to quantify the default risk of mortgage credits for lenders.

Keywords: conditional copula, mortgage, default risk

JEL Classification: C58, G21, R21, R31