With the collapse in house prices during the great recession many mortgage holders were in a position of negative equity - owning a property that is worth less than the repayment value of the mortgage. In such cases mortgage holders may decide to strategically default, i.e., renege on the cash flow liability of the mortgage loan and surrender the property to the mortgage issuer. In other circumstances a mortgage holder may default due to personal income decline which makes payment infeasible (unaffordability default) or for a combination of strategic and affordability causes (dual-trigger default). New research by Professor Gregory Connor and Dr. Tom Flavin of the Finance Group at Maynooth University utilizes a database of troubled Irish mortgages to model the default decisions of Irish mortgage holders. We include both affordability-related and strategic-related explanatory variables. We find that both types of explanatory variables play a role in the explosive growth in Irish mortgage default after the Irish banking crisis and temporary legal prohibition of property repossession. We find that a dual-trigger model of default best fits the Irish data. Given the unusual features of the Irish market, our findings both complement and strengthen existing empirical findings from other national mortgage markets.
This paper was published in Journal of Housing Economics, 2015, vol. 28, issue C, pages 59-75
