A model of mortgage losses and its applications for macroprudential instruments |
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| Affiliation: | 1. Department of International Business Studies, National Chi Nan University, Nantou County, Taiwan, ROC;2. National Sun Yat-sen University, Kaohsiung, Taiwan, ROC;1. Lally School of Management, Rensselaer Polytechnic Institute, Troy, NY, USA;2. Warwick Business School, University of Warwick, Coventry, UK;3. The Peter J. Tobin College of Business, St. John''s University, Queens, NY 11439, USA;1. ALBA Graduate Business School, Xenias 6-8, Athens 11528, Greece;2. Surrey Business School, University of Surrey, Guildford, Surrey GU2 7XH, United Kingdom;3. Financial Engineering Laboratory, Technical University of Crete, Chania 73100, Greece;1. Swiss Finance Institute and University of Lausanne, Faculty of Business and Economics, CH 1015 Lausanne, Switzerland;2. University of Lausanne, Faculty of Business and Economics, CH 1015 Lausanne, Switzerland |
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| Abstract: | We develop a theoretical model of mortgage loss rates that evaluates their main underlying risk factors. Following the model, loss rates are positively influenced by the house price level, the loan-to-value of mortgages, interest rates, and the unemployment rate. They are negatively influenced by the growth of house prices and the income level. The calibration of the model for the US and Switzerland demonstrates that it is able to describe the overall development of actual mortgage loss rates. In addition, we show potential applications of the model for different macroprudential instruments: stress tests, countercyclical buffer, and setting risk weights for mortgages with different loan-to-value and loan-to-income ratios. |
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| Keywords: | Mortgage market Credit risk Macroprudential instruments |
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