Article ID Journal Published Year Pages File Type
1000034 Journal of Financial Stability 2015 12 Pages PDF
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-sample as well as out-of-sample.•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.•The development of a foundation for these macroprudential instruments is the main contribution of this paper.

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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Social Sciences and Humanities Economics, Econometrics and Finance Economics, Econometrics and Finance (General)
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