The rise of risk-based pricing of mortgage interest rates in Italy

The determinants of households’ repayment difficulties on mortgage loans: evidence from Italian microdata

“…Households living in the South of Italy display a higher probability of experiencing repayment difficulties. This confirms previous empirical evidence (Bonaccorsi di Patti and Felici, ; Magri and Pico, ) and suggests that household debt sustainability represents a major issue especially in less developed regions. However, conditional on insolvency, no significant regional differences in arrears levels can be pointed out.…”

“…Mortgage contract characteristics also play a significant role in determining the probability of repayment difficulties. Magri and Pico (), using EU‐SILC data, find that higher education and income levels reduce the likelihood of household mortgage arrears. Insolvencies are also more likely when the household head is in bad health, unemployed or an immigrant.…”

“…Information on mortgage arrears refers to whether the household has been unable to pay on time for mortgage repayment in the last 12 months before the date of the interview and thus our analysis mainly relates to 2007, but also covers the first months of 2008. As pointed out by Magri and Pico (), this definition may lead to overestimate repayment difficulties as it also includes households that have been in arrears for less than 90 days, the threshold usually considered in bank supervisory reports to determine insolvencies.…”

“… As the SELOP model is estimated only on the sub‐sample of households with a mortgage, there could be a further selectivity issue. Following Magri and Pico (), we have estimated a bivariate probit model with sample‐selection to jointly analyse the probability of having a mortgage and the probability of arrears. Results (available from the authors) indicate that selectivity bias is negligible, so that the SELOP model of arrears can be consistently estimated.…”

Pricing Defaulted Italian Mortgages

“…Without correctly quantifying the riskiness of the defaulted mortgages held on their balance sheets, banks might not make enough provisions of non-performing loans and violate Basel III recommendations. Given that risk-based pricing is now more widespread in Italy (Magri and Pico 2011), adequate assessment of riskiness is vital to a sound banking sector.…”