![]() ![]() Arguably, restrictive policies that discourage household leverage may strengthen financial stability over the medium term by reducing the incidence of defaults. ![]() 2011, Gerlach-Kristen and Lyons 2015, Allen et al. Although there is growing evidence that macroprudential policy instruments affect housing credit growth and house price increases (Galati and Moessner 2013), there is only limited evidence on whether these instruments influence the incidence of mortgage defaults (Wong et al. In addition to macroeconomic and institutional factors, macroprudential policies targeting the household sector may influence developments in the mortgage market. These costs not only depend on lenders’ willingness to inflict sanctions, but on the entire set of institutional arrangements governing the credit market, such as the rule of law, creditor rights, and bankruptcy laws (Japelli et al. Borrowers may default if their (potential) gains exceed the perceived costs of the expected sanctions, including access to future finance and its price (Kehoe and Levine 2001, Chatterjee et al. 2010, Aron and Muealbauer 2016, Goodstein et al. If a household faces affordability problems - which may be caused by a drop in income (for example, due to unemployment), higher mortgage payments (for example, due to higher interest rates), or a decline in house prices (leading to negative equity) - it may have no other option than to default on its mortgage obligations (Diaz-Serrano 2004, Elul et al. The strategic default theory holds that households choose to default voluntarily after a rational analysis of all future costs and benefits associated with continuing or not continuing to meet the obligations of the mortgage. According to the ability-to-pay theory of default, individuals default involuntarily when they are unable to meet current payments. ![]() ![]() The theoretical literature suggests two main explanations for mortgage arrears: ability-to-pay and strategic default (Whitley et al. Potential causes for mortgage delinquency This may increase consumption volatility, both at the household and aggregate level, with repercussions for the real economy. Second, mortgage defaults reduce households’ creditworthiness, thereby making it more difficult for them to access future financing.First, mortgage defaults dilute the fundamentals of lending financial institutions, and amplify disruptions in financial markets.Likewise, the incidence of mortgage arrears differs considerably across countries, as well as over time for individual countries.Ī better understanding of the factors that explain cross-country and within-country differences in mortgage delinquency is thus of great importance for policymakers for at least two reasons. The initial shock of an increase in mortgage arrears, due to a decline in house prices in the US and some European countries, triggered a liquidity crisis that turned into a full-blown financial crisis.1 Despite a significant contraction of the sector in the aftermath of the crisis, mortgage lending still accounts for a large share of both household debt and banks’ assets.2 Yet, given the variation in economic and financial developments, there are important differences in the depth of mortgage markets across countries. The Global Crisis highlighted how devastating fragilities in the residential mortgage market can be. ![]()
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