The determinants of the loss given default of residential mortgage loans in Portugal

Márcio Mateus

Working Papers from Banco de Portugal, Economics and Research Department

Abstract: In this paper we investigate the determinants of the loss given default (LGD) of mortgage loans in Portugal. Exploring loan-level data from the Portuguese Central Credit Register, we show that the original LTV (oLTV) ratio is by far the most important determinant of the LGD of mortgage loans, but the relation between these two variables is not linear. A higher oLTV ratio is associated with a higher LGD of mortgage loans, but only above a certain threshold. We provide evidence that the critical area in the relationship between these two variables lies in a range between 80% and 100%. Our results also highlight the importance of the house price cycle history in explaining the LGD, with distinct short and long-term effects. In the short-term we find a negative correlation between house prices and LGD, meaning that a house price increase just before loan origination seems to contribute to the decrease of the LGD in the future. In the long-term the correlation is positive, which suggests that the higher the house price has increased in the past, the higher the future LGD is expected to be.

JEL-codes: G21 G28 (search for similar items in EconPapers)
Date: 2023
New Economics Papers: this item is included in nep-eec, nep-rmg and nep-ure
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