IDEAS home Printed from https://ideas.repec.org/p/boi/wpaper/2018.12.html
   My bibliography  Save this paper

LTV Limits and Borrower Risk

Author

Listed:
  • Nitzan Tzur-Ilan

    () (Bank of Israel)

Abstract

This paper explores the effects of the hard loan-to-value (LTV) limit implemented in Israel in 2012, which had three different cutoffs according to the borrower type: first-time home buyer, upgrader, or investor. The paper tries to overcome identification challenges where the treatment status is not observed. I find that this macroprudential policy measure succeeded in achieving its main goal, which was to reduce borrowers' leverage. I also find that constrained borrowers bought assets farther from the center of Israel, in neighborhoods with lower socioeconomic rankings; and a much stronger response than the impact of the 2010 soft LTV limit. Investors were found to be the borrower type most affected by the LTV limit. In terms of the credit market, the effect of the LTV limit on mortgage terms is counterintuitive: the limit increased the interest rate and the term to maturity. Plausible explanations for those results are discussed.​

Suggested Citation

  • Nitzan Tzur-Ilan, 2018. "LTV Limits and Borrower Risk," Bank of Israel Working Papers 2018.12, Bank of Israel.
  • Handle: RePEc:boi:wpaper:2018.12
    as

    Download full text from publisher

    File URL: ftp://repec-boi.northeurope.cloudapp.azure.com/RePEc/boi/wpaper/WP_2018.12.pdf
    File Function: First version, 2018
    Download Restriction: no

    References listed on IDEAS

    as
    1. Kuttner, Kenneth N. & Shim, Ilhyock, 2016. "Can non-interest rate policies stabilize housing markets? Evidence from a panel of 57 economies," Journal of Financial Stability, Elsevier, vol. 26(C), pages 31-44.
    2. Douglas Kiarelly Godoy de Araujo & João Barata Ribeiro Blanco Barroso & Rodrigo Barbone Gonzalez, 2016. "Loan-To-Value Policy and Housing Loans: effects on constrained borrowers," Working Papers Series 445, Central Bank of Brazil, Research Department.
    3. Jérôme Vandenbussche & Ursula Vogel & Enrica Detragiache, 2015. "Macroprudential Policies and Housing Prices: A New Database and Empirical Evidence for Central, Eastern, and Southeastern Europe," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 47(S1), pages 343-377, March.
    4. Navon, Guy & Tojerow, Ilan, 2006. "The Effects of Rent-Sharing on the Gender Wage Gap in the Israeli Manufacturing Sector," IZA Discussion Papers 2361, Institute of Labor Economics (IZA).
    5. 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.
    6. Giovanni Favara & Jean Imbs, 2015. "Credit Supply and the Price of Housing," American Economic Review, American Economic Association, vol. 105(3), pages 958-992, March.
    7. Yossi Yakhin & Natalya Presman, 2013. "A Flow-Accounting Model of the Labor Market: An Application to Israel," Bank of Israel Working Papers 2013.05, Bank of Israel.
    8. James J. Heckman & Hidehiko Ichimura & Petra E. Todd, 1997. "Matching As An Econometric Evaluation Estimator: Evidence from Evaluating a Job Training Programme," Review of Economic Studies, Oxford University Press, vol. 64(4), pages 605-654.
    9. repec:ags:stataj:116250 is not listed on IDEAS
    10. John Y. Campbell & Tarun Ramadorai & Benjamin Ranish, 2015. "The Impact of Regulation on Mortgage Risk: Evidence from India," American Economic Journal: Economic Policy, American Economic Association, vol. 7(4), pages 71-102, November.
    11. Alberto Abadie, 2005. "Semiparametric Difference-in-Differences Estimators," Review of Economic Studies, Oxford University Press, vol. 72(1), pages 1-19.
    12. Janko Cizel & Jon Frost & Aerdt G. F. J. Houben & Peter Wierts, 2016. "Effective Macroprudential Policy; Cross-Sector Substitution from Price and Quantity Measures," IMF Working Papers 16/94, International Monetary Fund.
    13. Stijn Claessens, 2015. "An Overview of Macroprudential Policy Tools," Annual Review of Financial Economics, Annual Reviews, vol. 7(1), pages 397-422, December.
    14. Melnick, Rafi, 1995. "Financial Services, Cointegration, and the Demand for Money in Israel," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 27(1), pages 140-153, February.
    15. 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.
    16. repec:eee:jhouse:v:41:y:2018:i:c:p:153-167 is not listed on IDEAS
    17. repec:boi:isrerv:v:10:y:2012:i:1:p:1-38 is not listed on IDEAS
    18. Duca, John V. & Muellbauer, John & Murphy, Anthony, 2010. "Housing markets and the financial crisis of 2007-2009: Lessons for the future," Journal of Financial Stability, Elsevier, vol. 6(4), pages 203-217, December.
    19. Kelly, Robert & McCann, Fergal & O’Toole, Conor, 2018. "Credit conditions, macroprudential policy and house prices," Journal of Housing Economics, Elsevier, vol. 41(C), pages 153-167.
    20. Alberto Abadie & Guido W. Imbens, 2011. "Bias-Corrected Matching Estimators for Average Treatment Effects," Journal of Business & Economic Statistics, Taylor & Francis Journals, vol. 29(1), pages 1-11, January.
    21. 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.
    22. Anil K Kashyap & Richard Berner & Charles A E Goodhart, 2011. "The Macroprudential Toolkit," IMF Economic Review, Palgrave Macmillan;International Monetary Fund, vol. 59(2), pages 145-161, June.
    23. Abadie, Alberto & Drukker, David M. & Herr, Jane Leber & Imbens, Guido W., 2004. "Implementing matching estimators for average treatment effects in Stata," Stata Journal, StataCorp LP, vol. 4(3), pages 1-22.
    24. Lu Han & Chandler Lutz & Benjamin Sand & Derek Stacey, 2018. "Do Financial Constraints Cool a Housing Boom?," Working Papers 073, Ryerson University, Department of Economics.
    25. Andrew F. Haughwout & Donghoon Lee & Joseph Tracy & Wilbert Van der Klaauw, 2011. "Real estate investors, the leverage cycle, and the housing market crisis," Staff Reports 514, Federal Reserve Bank of New York.
    26. Konstantin Kosenko & Noam Michelson, 2018. "It Takes More than Two to Tango: Understanding the Dynamics behind Multiple Bank Lending and its Implications," Bank of Israel Working Papers 2018.11, Bank of Israel.
    27. David Elkayam & Alex Ilek, 2013. "Estimating the NAIRU for Israel, 1992–2011," Bank of Israel Working Papers 2013.04, Bank of Israel.
    28. Cerutti, Eugenio & Claessens, Stijn & Laeven, Luc, 2017. "The use and effectiveness of macroprudential policies: New evidence," Journal of Financial Stability, Elsevier, vol. 28(C), pages 203-224.
    29. repec:hrv:faseco:34331451 is not listed on IDEAS
    30. Polina Dovman & Sigal Ribon & Yossi Yakhin, 2012. "The Housing market in Israel 2008-2010: Are house prices a "bubble"?," Israel Economic Review, Bank of Israel, vol. 10(1), pages 1-38.
    31. Nitzan Tzur-Ilan, 2017. "The Effect of Credit Constraints on Housing Choices: The Case of LTV limit," Bank of Israel Working Papers 2017.03, Bank of Israel.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    LTV; mortgages; housing;

    JEL classification:

    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • R28 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Household Analysis - - - Government Policy

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:boi:wpaper:2018.12. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Dafna Koby). General contact details of provider: http://edirc.repec.org/data/boigvil.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.