A Comment on the Procylicality of Mortgage Lending

This paper comments on the procyclicality of mortgage lending. By applying a framework for credit constraints along the lines of Kiyotaki and Moore (1997), the credit risk assessments underlying mortgage lending is shown to contain a potential regime shift. Depending on the relationship between house price growth and mortgagorsí alternative rate of return, the weight given to collateral and debt-servicing ability may vary according to the house price cycle. While debt-servicing ability might dominate lending when house price growth is low, collateral may take precedence when price growth increases. The regime shifts might come about when house price appreciation is expected, the competition for mortgage market shares is tough, or mortgagorsí internal guidelines for credit risk assessments are weak. In the case of regime shifts, increased house price growth might, first of all, stimulate owner occupation and LTV-ratios, and second, make the financial accelerator context specific.