What Drives Mortgage Default Risk in Europe and the U.S.?

Marco Gross, Thierry Tressel, Xiaodan Ding and Eugen Tereanu

No 2022/065, IMF Working Papers from International Monetary Fund

Abstract: We present an analysis of the sensitivity of household mortgage probabilities of default (PDs) and loss given default (LGDs) on unemployment rates, house price growth, interest rates, and other drivers. A structural micro-macro simulation model is used to that end. It is anchored in the balance sheets and income-expense flow data from about 95,000 households and 230,000 household members from 21 EU countries and the U.S. We present country-specific nonlinear regressions based on the structural model simulation-implied relation between PDs and LGDs and their drivers. These can be used for macro scenario-conditional forecasting, without requiring the conduct of the micro simulation. We also present a policy counterfactual analysis of the responsiveness of mortgage PDs, LGDs, and bank capitalization conditional on adverse scenarios related to the COVID-19 pandemic across all countries. The economics of debt moratoria and guarantees are discussed against the background of the model-based analysis.

Keywords: Credit risk; household sector; micro-macro simulation modeling; financial policies; probabilities of default; mortgage PD; mortgage LGDs; mortgage default risk; simulation model; Mortgages; Housing prices; Loans; Unemployment rate; Unemployment benefits; Europe; Global; Eastern Europe (search for similar items in EconPapers)
Pages: 38
Date: 2022-04-01
New Economics Papers: this item is included in nep-ban, nep-cmp, nep-eec, nep-rmg and nep-ure
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