Three Triggers? Negative Equity, Income Shocks and Institutions As Determinants of Mortgage Default

29 Pages Posted: 6 Aug 2019

See all articles by Andrew Linn

Andrew Linn

Bank of England

Ronan C. Lyons

Trinity College Dublin; Spatial Economics Research Centre, LSE

Date Written: August 2, 2019

Abstract

In understanding the determinants of mortgage default, the consensus has moved from an ‘option theory’ model to the ‘double trigger’ hypothesis. Nonetheless, that consensus is based on within-country studies of default. This paper examines the determinants of mortgage default across five European countries, using a large dataset of over 2.3 million active mortgage loans originated between 1991 and 2013 across over 150 banks. The analysis finds support for both elements of the double trigger: while negative equity itself is a relatively small contributor to default, the effect of unemployment, and other variables such as the interest rate, is stronger for those in negative equity. The double trigger, however, varies by country: country-specific factors are found to have a large effect on default rates. For any given level of a loan’s Loan to Value (‘LTV’) ratio, and as LTV changes, borrowers were more sensitive to the interest rate and unemployment in Ireland and Portugal than in the UK or the Netherlands.

Keywords: Mortgage default, Negative equity, Double trigger, European Union

JEL Classification: G21, R31

Suggested Citation

Linn, Andrew and Lyons, Ronan C., Three Triggers? Negative Equity, Income Shocks and Institutions As Determinants of Mortgage Default (August 2, 2019). Bank of England Working Paper No. 812, August 2019. Available at SSRN: https://ssrn.com/abstract=3432352 or http://dx.doi.org/10.2139/ssrn.3432352

Andrew Linn (Contact Author)

Bank of England ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom

Ronan C. Lyons

Trinity College Dublin ( email )

Dublin 2
Ireland

Spatial Economics Research Centre, LSE ( email )

Houghton Street
London, WC2A 2AE
United Kingdom

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