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The credit-risk implications of home ownership promotion: The effects of public subsidies and adjustable-rate loans

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  • Dietsch, Michel
  • Petey, Joël

Abstract

This study analyzes the credit risk of housing loans with a particular focus on mechanisms that may help disentangling the financial constraints of low-income borrowers: public support and access to adjustable-rate loans. Using a large database of French housing loans covering the years 2000–2010, we show the following: supplying loans with financial assistance helps financially constrained borrowers to absorb income shocks, adjustable-rate loans are riskier on average, and the combination of public support and adjustable rates can lead to a concentration of risk in the lender’s portfolio. The risk measurement methodology used in this paper extends the one-factor economic capital model underlying the Basel 2 regulatory credit-risk formulas. This portfolio approach leads to the credit risk of housing loans being handled as a portfolio management issue for the lender. From this perspective, our results also illustrate that the ability to promote access to homeownership to low-income borrowers may be determined by the lender’s capacity to identify diversification benefits at the portfolio level. Thus, risky borrowers may have a limited credit-risk level from the lender’s perspective, which facilitates the supply of housing finance.

Suggested Citation

  • Dietsch, Michel & Petey, Joël, 2015. "The credit-risk implications of home ownership promotion: The effects of public subsidies and adjustable-rate loans," Journal of Housing Economics, Elsevier, vol. 28(C), pages 103-120.
  • Handle: RePEc:eee:jhouse:v:28:y:2015:i:c:p:103-120
    DOI: 10.1016/j.jhe.2015.03.001
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    More about this item

    Keywords

    Housing finance; Downside subsidies; Interest rate subsidies; Credit risk; Economic capital;
    All these keywords.

    JEL classification:

    • R31 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Real Estate Markets, Spatial Production Analysis, and Firm Location - - - Housing Supply and Markets
    • R38 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Real Estate Markets, Spatial Production Analysis, and Firm Location - - - Government Policy
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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