The Good, The Bad and The Impaired - A Credit Risk Model of the Irish Mortgage Market

Using a uniquely constructed loan-level dataset of the residential mortgage book of Irish financial institutions, this paper provides a framework for estimating default probabilities of individual mortgages. In particular, the paper examines the progression of mortgages in arrears from 90 days to 360 days. This question is of major financial stability concern in an Irish context as the uncertainty concerning the quality of the loan books of the Irish financial institutions is due, in the main, to the perceived impaired nature of the residential mortgage book. Using this approach, default probabilities are shown to be “hump shaped” when conditioned on loan vintage, with loans originating between 2004 and 2006 are most likely to default.