Yvonne McCarthy

The Distribution of Debt Across Euro Area Countries: The Role of Individual Characteristics, Institutions and Credit Conditions

The aim of this paper is twofold. First, we present an up-to-date assessment of the differences across euro area countries in the distributions of various measures of debt conditional on household characteristics. We consider three different outcomes: the probability of holding debt, the amount of debt held and, in the case of secured debt, the interest rate paid on the main mortgage. Second, we examine the role of legal and economic institutions in accounting for these differences. We use data from the first wave of a new survey of household finances, the Household Finance and Consumption Survey, to achieve these aims. We find that the patterns of secured and unsecured debt outcomes vary markedly across countries. Among all the institutions considered, the length of asset repossession periods best accounts for the features of the distribution of secured debt. In countries with longer repossession periods, the fraction of people who borrow is smaller, the youngest group of households borrow lower amounts (conditional on borrowing), and the mortgage interest rates paid by low-income households are higher. Regulatory loan-to-value ratios, the taxation of mortgages and the prevalence of interest-only or fixed-rate mortgages deliver less robust results.

Disentangling the Mortgage Arrears Crisis: The Role of the Labour Market, Income Volatility and Housing Equity

Despite various efforts to address the mortgage arrears crisis, arrears remain at an elevated level. Designing policies to deal with such high levels of distress requires a deep understanding of the precise sources of the problem. Efforts to date, however, have been hampered by a lack of appropriate data. This paper relies on two new and unique datasets which overcome such issues. Specifically, using a combination of administrative loan-level data and a detailed survey of mortgage holders, we assess the role of the labour market, income volatility and housing equity in the mortgage arrears crisis. The results provide new insights on mortgage distress in Ireland; unemployment and housing equity are key drivers, as shown by previous research. However, the results also show that many borrowers experiencing arrears are currently employed. Many of these borrowers have suffered a significant drop in their income, a change in employment conditions or are in fragile employment, i.e. they are on a temporary contract, have been with their employer for a short time or have a history of unemployment. This shows that the current mortgage crisis, and efforts to prevent a further deterioration, requires more than simply targeting unemployment. Rather, such efforts should also aim to strengthen overall labour market conditions and job security.

Price Expectations, Distressed Mortgage Markets and the Housing Wealth Effect

Using a unique combination of regulatory and survey microdata, we examine the importance of the life cycle theory of consumption in estimating housing wealth effects for the Irish mortgage market. Since the recent financial crisis, this market has experienced substantial house price declines and negative equity. Thus, house price expectations are likely to be important in influencing housing wealth effects. We find a positive correlation between consumption and changes in housing wealth among our sample of mortgaged Irish households. Furthermore, we find that this positive association only exists when housing wealth changes are perceived to be of a permanent nature.