The Impact of Repossession Risk on Mortgage Default
Terry O'Malley ()
No 1/RT/18, Research Technical Papers from Central Bank of Ireland
Abstract:
This paper studies the effect of removing repossession risk on a borrower’s decision to default on their mortgage. I exploit quasi-experimental variation in home-repossession law generated by a legal ruling in Ireland, which retroactively removed repossession risk on properties mortgaged before a certain date. Using matched data, sampled locally around this cut-off date, and a difference-in-differences research design, I find that the removal of credible repossession risk led to an immediate increase in mortgage default of 0.5 percentage points a quarter. Consistent with economic models of mortgage default, I find that the effect is driven by borrowers with low and negative home equity, but also by those with lower incomes and higher interest rates.
Date: 2018-02
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