The role of mortgage payment insurance in reducing the mortgage default risk level in Latvia

Abstract

Purpose. The use mortgage payment insurance as an instrument to reduce the credit risk of mortgage loans in Latvia is significantly lower than in EU and other developed countries. The authors aim to investigate the role of mortgage payment insurance in reducing the credit risk of mortgage loans and assess its potential impact on the housing market in Latvia.

Design. The authors created the following research structure: Information on the level of use and coverage of home loan payment insurance in Latvian commercial banks has been collected and analysed. The authors carried out calculations of a person's risk statistics in Latvia and modelling of the potential impact of a borrower’s insurance on the household’s losses.

Findings. Mortgage loans are one of the key resources for improving the welfare of families in developed countries. On the other hand, during the recent crisis 16% of borrowers faced problems with housing loan repayment, while 10% of borrowers were forced to look for new housing because the property was taken over as a result of default (FCMC, 2019). This problem is not systematically addressed at the moment in commercial banks in Latvia.

Originality. No studies have been carried out in Latvia that assess losses in case of temporary incapacity, permanent incapacity for work or forced unemployment in credit institutions and households in Latvia in the context of mortgage lending.