A Transitions-Based Model of Default for Irish Mortgages

Robert Kelly and Terry O'Malley ()

No 17/RT/14, Research Technical Papers from Central Bank of Ireland

Abstract: Using a uniquely constructed loan-level dataset of the residential mortgage book of Irish financial institutions, this paper provides a framework for estimating default probabilities of individual mortgages. In contrast to the popular stock delinquency approach, this model provides estimates of default and cure flows: a requirement of the stress test approach adopted by the European Central Bank's comprehensive assessment. In addition, both default and cure transitions are modelled as functions of micro- and macro-covariates including loan characteristics and current macroeconomic conditions such as house prices and unemployment. When comparing the competing equity and affordability effects, labour market deterioration played a stronger role than house equity in the rise of Irish default rates. For cures, a scarring effect of default is identified and estimated with the probability of a loan returning to performing reducing by 25 per cent each quarter a loan remains delinquent.

Keywords: Mortgage Default Modelling; Irish Banks; ECB Comprehensive Assessment. (search for similar items in EconPapers)
JEL-codes: G01 G12 G21 (search for similar items in EconPapers)
Date: 2014-11
New Economics Papers: this item is included in nep-rmg and nep-ure
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Citations: View citations in EconPapers (10)

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