The Impact of Repossession Risk on Mortgage Default

Terry O'Malley

Journal of Finance, 2021, vol. 76, issue 2, 623-650

Abstract: I study the effect of removing repossession risk on a mortgagor's decision to default. Reducing default costs may result in strategic default, particularly during crises when homeowners can be substantially underwater. I analyze difference‐in‐differences variation in repossession risk generated by an unexpected legal ruling in Ireland that prohibited collateral enforcement on delinquent residential mortgages originated before a particular date. I estimate that borrowers defaulted by 0.3 percentage points more each quarter after the ruling, a relative increase of approximately one‐half. High loan‐to‐value ratios and low liquidity are associated with a larger treatment effect, suggesting both equity and consumption‐based motivations.

Date: 2021
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https://doi.org/10.1111/jofi.12990

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Persistent link: https://EconPapers.repec.org/RePEc:bla:jfinan:v:76:y:2021:i:2:p:623-650

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