The Impact of Repossession Risk on Mortgage Default

Abstract

I study the effect of removing repossession risk on a mortgagor's decision to default. Reducing default costs may result in strategic default, particularly during crises when homeowners can be substantially underwater. I analyze difference-in-differences variation in repossession risk generated by an unexpected legal ruling in Ireland that prohibited collateral enforcement on delinquent residential mortgages originated before a particular date. I estimate that borrowers defaulted by 0.3 percentage points more each quarter after the ruling, a relative increase of approximately one-half. High loan-to-value ratios and low liquidity are associated with a larger treatment effect, suggesting both equity and consumption-based motivations.