Delivering Debt Relief through the Banking Sector: Lessons from the Irish Mortgage Market Delivering Debt Relief through the Banking Sector: Lessons from the Irish Mortgage Market

By Claire Labonne, Fergal McCann, and Terry O’Malley

How do banks design mortgage modifications when under regulatory expectation to issue them widely and quickly? Who do they allocate modifications to, and how deep are repayment cuts? How many modified loans end up re-defaulting? A large-scale Irish program allows us to tackle these questions using household- and loan-level data from 2012 to 2016. We show that the issuance of permanent modifications is not uniform across the credit risk distribution: those with a moderate ability to repay are more likely to receive a modification than those in deepest financial difficulty. Repayment cuts however are more generous as repayment capacity weakens, as long as borrowers have some surplus income available to service debt. Finally, deeper repayment cuts and lower payment-to-income ratios lower redefault rates, confirming prior evidence on the importance of liquidity for mortgage distress.