The role of mortgage energy efficiency in the probability of default and in determining capital requirements

Abstract

Our study aims to contribute to the literature on mortgage defaults and energy efficiency of the collateral. The risk differentials of green mortgages are highly relevant from a policy perspective, especially for the determination of capital requirements that are traditionally risk-based. As a theoretical background, we describe the channels through which the energy efficiency of households can reduce the probability of default. Within this decomposition, we distinguish between the effects of disposable income, financial literacy, the effect of wealth and the effect of the real estate collateral. We analyze the effect of the increased disposable income of energy-efficient households on the probability of default of mortgage loans in Hungary, where the central bank introduced a preferential capital requirement program for green mortgage loans. The primary outcome of energy efficiency gains is savings in energy units. In our study, we present the process of determining the theoretically and measurably achievable energy savings resulting from the limiting mechanisms. Due to the changing energy prices, we will not convert the energy measurement units into currency. The primary goal of our study is to present the methodology of how the results of energy savings can be included in credit risk.