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Loan-to-value policy and housing finance: effects on constrained borrowers

Author

Listed:
  • Douglas Kiarelly Godoy de Araujo
  • João Barata R B Barroso
  • Rodrigo Barbone Gonzalez

Abstract

This paper explores the effects on constrained borrowers of an LTV limit implemented on September 2013 on two major segments of housing finance in Brazil. LTV (hard) limits and related policies entail identification challenges, since constrained individuals are no longer directly observed after policy implementation. In this paper, partially observed treatment status is overcome by the use of an adjusted difference-in-difference method, focusing on the average treatment effect on the treated borrowers (i.e. those that would violate the LTV limit if allowed to do so). We use comprehensive loan-level data on mortgages augmented with a detailed and granular employment register. In the most affected segment, constrained individuals must meet the new LTV limit. These treated borrowers purchase more affordable homes and are less likely to be in arrears 12 months in the future. In the least affected segment, constrained borrowers also end-up meeting the new LTV limit, but the impacts are smaller and we find no significant effects on borrower's housing choice or morose debt.

Suggested Citation

  • Douglas Kiarelly Godoy de Araujo & João Barata R B Barroso & Rodrigo Barbone Gonzalez, 2017. "Loan-to-value policy and housing finance: effects on constrained borrowers," BIS Working Papers 673, Bank for International Settlements.
  • Handle: RePEc:bis:biswps:673
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    References listed on IDEAS

    as
    1. Deniz O Igan & Heedon Kang, 2011. "Do Loan-To-Value and Debt-To-Income Limits Work? Evidence From Korea," IMF Working Papers 11/297, International Monetary Fund.
    2. John Y. Campbell & João F. Cocco, 2003. "Household Risk Management and Optimal Mortgage Choice," The Quarterly Journal of Economics, Oxford University Press, vol. 118(4), pages 1449-1494.
    3. John V. Duca & John Muellbauer & Anthony Murphy, 2011. "House Prices and Credit Constraints: Making Sense of the US Experience," Economic Journal, Royal Economic Society, vol. 121(552), pages 533-551, May.
    4. Yuliya Demyanyk & Otto Van Hemert, 2011. "Understanding the Subprime Mortgage Crisis," Review of Financial Studies, Society for Financial Studies, vol. 24(6), pages 1848-1880.
    5. Luiz Awazu Pereira da Silva & Ricardo Eyer Harris, 2012. "Sailing through the Global Financial Storm: Brazil's recent experience with monetary and macroprudential policies to lean against the financial cycle and deal with systemic risks," Working Papers Series 290, Central Bank of Brazil, Research Department.
    6. Bruno Martins & Ricardo Schechtman, 2013. "Loan Pricing Following a Macro Prudential Within-Sector Capital Measure," Working Papers Series 323, Central Bank of Brazil, Research Department.
    7. Crowe, Christopher & Dell’Ariccia, Giovanni & Igan, Deniz & Rabanal, Pau, 2013. "How to deal with real estate booms: Lessons from country experiences," Journal of Financial Stability, Elsevier, vol. 9(3), pages 300-319.
    8. Hallissey, Niamh & Kelly, Robert & O'Malley, Terry, 2014. "Macro-prudential Tools and Credit Risk of Property Lending at Irish banks," Economic Letters 10/EL/14, Central Bank of Ireland.
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    Cited by:

    1. João Barata R B Barroso & Rodrigo Barbone Gonzalez & Bernardus F Nazar Van Doornik, 2017. "Credit supply responses to reserve requirement: loan-level evidence from macroprudential policy," BIS Working Papers 674, Bank for International Settlements.

    More about this item

    Keywords

    macroprudential policy; credit registry data; panel data models;

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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