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Irish Mortgage Default Optionality

Gregory Connor () and Thomas Flavin ()

Economics Department Working Paper Series from Department of Economics, National University of Ireland - Maynooth

Abstract: The owner of a residential property subject to a nonrecourse mortgage essentially has a put option against the market value of the property. If the market price of the property falls sufficiently, the owner can surrender the property to the mortgage issuer and in exchange receive full offset of the cashfl?ow liability of the mortgage loan. A similar but diluted put optionality holds for recourse mortgages if there are legal or practical limits to the mortgage issuer?s recourse claim against the owner?s future income. Previous research based on American data fi?nds that put optionality is an important, but not exclusive, determinant of mortgage default. This paper utilizes a database of troubled Irish mortgages to analyze the infl?uence of put optionality on Irish property owners' ?default behaviour. We fi?nd that put optionality is a very important explanatory variable for observed Irish mortgage defaults, complementing and strengthening existing empirical fi?ndings from US mortgage markets.

Keywords: mortgage default; put optionality (search for similar items in EconPapers)
JEL-codes: G21 R30 (search for similar items in EconPapers)
Pages: 43 pages
Date: 2013
New Economics Papers: this item is included in nep-ure
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