What drives mortgage default in Europe? The role of liquidity, equity and debt enforcement

Summary

Using harmonized household data from 18 European countries, this paper studies what triggers mortgage default. We distinguish between liquidity stress, negative equity, and the double trigger, where both occur simultaneously. We find that all three increase default risk, but the double trigger is by far the strongest predictor. The results also show that debt enforcement institutions shape how strongly equityrelated incentives affect mortgage default.

Highlights

A theory-based approach
Rather than studying isolated shocks (e.g. unemployment), this paper tests competing mortgage default theories directly by classifying households into mutually exclusive trigger states. This allows a direct comparison of the relative importance of liquidity stress, negative equity, and the double trigger.

Trigger patterns vary across institutions
Trigger relevance differs across debt enforcement regimes. In weaker enforcement settings, negative equity accounts for a larger share of observed default risk. This pattern is consistent with lower expected default costs increasing equityrelated default incentives.

Policy needs a joint risk view
Mortgage risk cannot be assessed from repayment capacity or collateral values alone. Default risk is highest when both coincide. Cross-country differences in trigger relevance further suggest that borrower-based measures should be activated and calibrated nationally.