Delinquency and default in ARMS: The effects of protected equity

Abstract

This research takes advantage of the use of compulsory retirement savings to finance the purchase of housing in Singapore and the regulatory protection conferred to the savings used to conduct a natural experiment to investigate the role of government and the role of protected borrower equity in controlling mortgage risk. Simultaneously, we postulate mortgage delinquency as a necessary decision before the default decision such that motivations for delinquency exert significant influences on subsequent motivations for default. We find that increasing the use of protected borrower equity at loan origination increases the risk of default, but the risk decreases as the protected equity is built up over time. We also find that the relationship between delinquency and default is highly significant and should thus be included in subsequent default risk modeling. Finally, previous delinquency experiences may push mortgage loans towards repeated delinquency and more significantly, towards subsequent default.