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Repayment capacity, debt service ratios and mortgage default: An exploration in crisis and non-crisis periods. ESRI Working Paper No. 652 February 2020

O'Toole, Conor and Slaymaker, Rachel (2020) Repayment capacity, debt service ratios and mortgage default: An exploration in crisis and non-crisis periods. ESRI Working Paper No. 652 February 2020. [Working Paper]

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    Abstract

    In this paper, we explore the impact of current household repayment capacity on mortgage default using household-level panel data over the period 2004-2017 for Ireland. We measure repayment capacity as changes in the level of the current debtservice to income ratio to capture a direct channel for affordability shocks. We model the relationship between repayment capacity and default using a discrete time logit survival model of default flows. We test for a non-linear relationship to explore whether negative and positive shocks have asymmetric effects and whether shocks depend on household absorptive capacity. We also test the differing impacts of repayment shocks in crisis and non-crisis times and whether any differences are explained by negative equity or liquidity constraints. A number of endings emerge. We find that deteriorations in current debt service capacity have a positive and increasing effect on default which is dependent on the level of indebtedness or absorptive capacity. We find that the relationship between deteriorations in the repayment capacity and default are worsened in crisis times and we show that this is due to the presence of negative equity and liquidity constraints in these periods.

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    Item Type: Working Paper
    Uncontrolled Keywords: mortgage default; debt-service-ratio; income shocks; loan-to-value ratios
    Subjects for non-EU documents: Countries > Ireland
    EU policies and themes > Policies & related activities > economic and financial affairs > housing
    Subjects for EU documents: UNSPECIFIED
    EU Series and Periodicals: UNSPECIFIED
    EU Annual Reports: UNSPECIFIED
    Series: Series > Economic and Social Research Institute (ESRI), Dublin > ESRI Working Papers
    Depositing User: Phil Wilkin
    Official EU Document: No
    Language: English
    Date Deposited: 23 Mar 2020 16:31
    Number of Pages: 28
    Last Modified: 23 Mar 2020 16:31
    URI: http://aei.pitt.edu/id/eprint/102640

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