The Triple Trigger? Negative Equity, Income Shocks and Institutions as Determinants of Mortgage Default

In understanding the determinants of mortgage default, the consensus has moved from an 'option theory' model to the 'double trigger' hypothesis. Nonetheless, that consensus is based on within-country studies of default. This paper examines the determinants of mortgage default across five European countries, using a large dataset of over 2.3 million active mortgage loans originated between 1991 and 2013 across over 150 banks. The analysis finds support for the double trigger hypothesis: changes in unemployment are important determinants of default, while negative equity itself is a relatively small contributor to default. Nonetheless, the effect of variables such as the interest rate and unemployment is stronger for those in negative equity. The double trigger, however, varies by country: country-specific factors are found to have a large effect on default rates. For any given level of LTV, and as LTV changes, borrowers were more sensitive to the interest rate and unemployment in Ireland and Portugal than in the UK or the Netherlands.