Agenda

Madi Mangan - Residual Mortgage Debt, NHG Insurance, and Defaults in the Netherlands

Abstract:  Conventional determinants of mortgage default include the liquidity of the borrower and affordability of the mortgage premiums. An alternative explanation of mortgage defaults can be negative home equity, resulting from fluctuations in house prices. To rationalize an increase in defaults in the presence of negative home equity, some authors refer to strategic defaults, i.e., the defaulting of those who could afford the payment of mortgage premiums but prefer to discharge their debt. We focus on the onset of negative home equity and the presence of a (semi-public) insurance accessible for a specific segment of the housing market, whose size has exogenously changed over time to study the effect of mortgage insurance on defaulting decisions. We complement the quasi-experimental setting with a structural approach; the estimation of an optimal stopping model. We found that not only the conventional determinants of mortgage default, that is, liquidity of the borrower and affordability of the mortgage, have the expected effects: terminal home equity does have a strong negative impact on the probability of default. This is opposed to standard stress-test models in which the probability of default depends solely on the affordability of the mortgage. We show that the bunching around qualification criteria argued by others, which is a potential indication of adverse selection, is either not the case with NHG or is solely explained by income at origination, and the interaction between house price, the NHG threshold, and household income.  Although NHG does not cause defaults in itself, it causes additional defaults for borrowers who separate from their partners after taking a mortgage, signalling the presence of strategic behaviour in the form of moral hazard. 

The seminar can be attended also remotely, connecting to ZOOM: https://unive.zoom.us/j/83316158636
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