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

By Marco Gross, Thierry Tressel, Xiaodan Ding, Eugen Tereanu

April 1, 2022

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Format: Chicago

Marco Gross, Thierry Tressel, Xiaodan Ding, and Eugen Tereanu. What Drives Mortgage Default Risk in Europe and the U.S.?, (USA: International Monetary Fund, 2022) accessed December 3, 2024

Disclaimer: IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

Summary

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.

Subject: Expenditure, Financial institutions, Housing prices, Labor, Loans, Mortgages, Prices, Unemployment benefits, Unemployment rate

Keywords: Credit risk, Eastern Europe, Europe, Financial policies, Global, Household sector, Housing prices, Loans, Micro-macro simulation modeling, Mortgage default risk, Mortgage LGDs, Mortgage PD, Mortgages, Probabilities of default, Simulation model, Unemployment benefits, Unemployment rate

Publication Details

Pages:

38
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2022/065
Stock No:

WPIEA2022065
ISBN:

9798400205705
ISSN:

1018-5941

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