Assessing mortgage default risk in full-recourse economies, with an application to the case of Chile

This paper is aimed at finding individual and systemic determinants of housing default in a full-recourse economy. We propose an empirical strategy that accounts for rare events and choice-based sampling bias and estimates the contribution of idiosyncratic and systemic determinants, as well as their...

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Main Authors: Diego Avanzini, Juan Francisco Martı́nez, Vı́ctor Pérez
Format: Article
Language:English
Published: Elsevier 2020-01-01
Series:Latin American Journal of Central Banking
Subjects:
Online Access:http://www.sciencedirect.com/science/article/pii/S2666143820300090
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author Diego Avanzini
Juan Francisco Martı́nez
Vı́ctor Pérez
author_facet Diego Avanzini
Juan Francisco Martı́nez
Vı́ctor Pérez
author_sort Diego Avanzini
collection DOAJ
description This paper is aimed at finding individual and systemic determinants of housing default in a full-recourse economy. We propose an empirical strategy that accounts for rare events and choice-based sampling bias and estimates the contribution of idiosyncratic and systemic determinants, as well as their interactions. To support our empirical approach, we adapt and extend a well-known model of mortgage default for nonrecourse economies (Geanakoplos and Zame, 2014), adding a nonpecuniary cost for defaulting to account for possible loss of utility due to the full-recourse framework. This model applies to economies such as Spain, Australia, and Chile, where defaulters can be prosecuted until their debts are completely settled. Under the proposed model, we obtain an analytical expression involving default determinants for micro and macro mortgage loans. As a case study, we estimate this relationship for the Chilean economy using information from the Chilean Survey of Household Finance (EFH). As stated by our micro–macro model, household financial conditions and their interactions with systemic determinants account for an important part of the cross-sectional probability of mortgage default.
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spelling doaj.art-414a9050eb9040abbb719194ea098c642022-12-21T22:01:32ZengElsevierLatin American Journal of Central Banking2666-14382020-01-0111100009Assessing mortgage default risk in full-recourse economies, with an application to the case of ChileDiego Avanzini0Juan Francisco Martı́nez1Vı́ctor Pérez2International Center for Globalization and Development—CIGLOB, Chile; Corresponding author.Central Bank of Chile, ChileProvida AFP, ChileThis paper is aimed at finding individual and systemic determinants of housing default in a full-recourse economy. We propose an empirical strategy that accounts for rare events and choice-based sampling bias and estimates the contribution of idiosyncratic and systemic determinants, as well as their interactions. To support our empirical approach, we adapt and extend a well-known model of mortgage default for nonrecourse economies (Geanakoplos and Zame, 2014), adding a nonpecuniary cost for defaulting to account for possible loss of utility due to the full-recourse framework. This model applies to economies such as Spain, Australia, and Chile, where defaulters can be prosecuted until their debts are completely settled. Under the proposed model, we obtain an analytical expression involving default determinants for micro and macro mortgage loans. As a case study, we estimate this relationship for the Chilean economy using information from the Chilean Survey of Household Finance (EFH). As stated by our micro–macro model, household financial conditions and their interactions with systemic determinants account for an important part of the cross-sectional probability of mortgage default.http://www.sciencedirect.com/science/article/pii/S2666143820300090C35D53E44G21
spellingShingle Diego Avanzini
Juan Francisco Martı́nez
Vı́ctor Pérez
Assessing mortgage default risk in full-recourse economies, with an application to the case of Chile
Latin American Journal of Central Banking
C35
D53
E44
G21
title Assessing mortgage default risk in full-recourse economies, with an application to the case of Chile
title_full Assessing mortgage default risk in full-recourse economies, with an application to the case of Chile
title_fullStr Assessing mortgage default risk in full-recourse economies, with an application to the case of Chile
title_full_unstemmed Assessing mortgage default risk in full-recourse economies, with an application to the case of Chile
title_short Assessing mortgage default risk in full-recourse economies, with an application to the case of Chile
title_sort assessing mortgage default risk in full recourse economies with an application to the case of chile
topic C35
D53
E44
G21
url http://www.sciencedirect.com/science/article/pii/S2666143820300090
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AT vıctorperez assessingmortgagedefaultriskinfullrecourseeconomieswithanapplicationtothecaseofchile