The paper assesses the extent to which mortgage rates in Italy are priced according to credit risk as proxied by the probability of household mortgage delinquency estimated using the EU-Silc database. For reasons of data availability we restrict the analysis of mortgage pricing to Italian households. Consistent with the more extensive use of credit scoring techniques, our estimates indicate that Italian lenders have increasingly priced mortgage interest rates with reference to credit risk. For mortgages granted between 2000 and 2007, a 1 percentage point increase in the probability of default is associated with a 21 basis point rise in mortgage interest rates, less than the 38 basis point premium Edelberg (2006) estimated for the U.S. at the end of the '90s.
Published in 2011 in: Journal of Banking and Finance, v. 35, 5, pp. 1277-1290
