Mortgage defaults, macroeconomics, and institutional arrangements: Beyond the standard Credit Scoring

Abstract

This paper explores determinants of mortgage default, enlightening the transmission mechanisms between the economic cycle, institutional arrangements and the microeconomic event of individual default. It revises the scope and limitations of standard credit-scoring models, that is those generic classification models used by banks to discriminate good from bad debtors. Starting from a microeconomic model of mortgage default, it is shown that there will be some level of strategic defaults, even in a hypothetical world in which standard Credit-Scoring models work perfectly. That means a specification error in standard models, which only capture the solvency-tied fundamentals of repayment, but no the strategic ones triggered by macroeconomic and institutional factors. Some alternative methods and policy measures are suggested.mortgage default; credit scoring; credit markets; institutional arrangements