Moral Hazard in the Mortgage Market: The Impact of Foreclosure Moratoria on Default

I examine whether foreclosure moratoria create moral hazard in the mortgage market by removing the credible threat of repossession. I exploit exogenous variation in home-repossession law generated by the 2011 Dunne judgment in... [ view full abstract ]

I examine whether foreclosure moratoria create moral hazard in the mortgage market by removing the credible threat of repossession. I exploit exogenous variation in home-repossession law generated by the 2011 Dunne judgment in Ireland, which ruled that repossession law no longer applied to existing mortgages originated before a certain date. Using data on the population of Irish mortgages originated just before and after this cut-off date and a difference-in-differences estimator, I find that the judgment led to an immediate increase in mortgage default. Using recursive partitioning, I show that the treatment effect is strongest for higher-leveraged borrowers with lower incomes, as might be predicted by economic theory.