A Critical Review of the UK Mortgage Default Literature Current Knowledge and Future Directions

Summary: • The current literature suggests that mortgage default is driven by a complex set of factors that affect a household’s ability and incentive to repay. • To gauge the importance of a particular driver of default risk, the effects of other factors have to be controlled for. Reliability of current estimates is therefore tempered by the omission of key variables in the underlying analysis. • Despite the large amount of research on MPPI, its overall impact on reducing arrears has yet to be systematically assessed in the context of a household model of mortgage risk that holds other factors constant. • More research is also needed at the household level on the effects of savings, income changes, household structure and housing equity. • Despite these failings, the existing research demonstrates the feasibility and usefulness of constructing household models using current UK data. • Such models have the potential to assist lenders, insurers and policy makers identify vulnerable borrowers and in predicting the impact of socio-economic changes. • The economic implications of default risk remain relatively unexplored, such as the labour supply effects of mortgage repayment difficulties and the balancing of risks and returns.