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

What Drives Mortgage Default Risk in Europe and the U.S.?
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Volume/Issue: Volume 2022 Issue 065
Publication date: April 2022
ISBN: 9798400205705
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Topics covered in this book

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Labor , Economics- Macroeconomics , Public Finance , Economics / General , 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

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.