The good, the bad and the impaired: A credit risk model of the Irish mortgage market

Robert Kelly and O’Malley, Terence
Authors registered in the RePEc Author Service: Terry O'Malley ()

Journal of Financial Stability, 2016, vol. 22, issue C, 1-9

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 almost four per cent each month a loan remains delinquent.

Keywords: Mortgage default modelling; Irish banks; ECB comprehensive assessment (search for similar items in EconPapers)
JEL-codes: E32 E51 F30 G01 G12 G21 (search for similar items in EconPapers)
Date: 2016
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (37)

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Working Paper: The Good, The Bad and The Impaired - A Credit Risk Model of the Irish Mortgage Market (2011)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:finsta:v:22:y:2016:i:c:p:1-9

DOI: 10.1016/j.jfs.2015.09.005

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