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

IMF Working Papers, April 1, 2022

Source details

Analysis of the sensitivity of household mortgage probabilities of default (PDs) and loss given default (LGDs) to:
- Unemployment rates
- House price growth
- Interest rates
- Other drivers
Method: structural micro-macro simulation model anchored in 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.
Outputs: country-specific nonlinear regressions based on the structural model simulation-implied relation between PDs and LGDs and their drivers, usable for macro scenario-conditional forecasting without running the micro simulation.

The paper quantifies sensitivity of mortgage PDs and LGDs to macroeconomic drivers (unemployment, house prices, interest rates) using the structural micro-macro model.
Country-specific nonlinear regressions capture heterogeneity across the 21 EU countries and the U.S.
The model supports macro scenario-conditional forecasting of mortgage credit risk by mapping macro variables to PDs and LGDs via the estimated nonlinear relations.

Presents a policy counterfactual analysis of the responsiveness of:
- Mortgage PDs
- Mortgage LGDs
- Bank capitalization

conditional on adverse scenarios related to the COVID-19 pandemic across all countries in the sample.

Discusses the economics of debt moratoria and guarantees in the context of the model-based analysis.

Country-specific nonlinear regression results can be applied directly for:
- Macro scenario-conditional forecasting of mortgage default risk
- Policy evaluation of measures such as debt moratoria and guarantees
- Assessing banking sector capitalization needs under adverse scenarios

Source: IMF Working Paper — "What Drives Mortgage Default Risk in Europe and the U.S.?"