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LTV Limits and Borrower Risk

Author

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  • 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
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    Cited by:

    1. Petr Polak & Lubos Komarek, 2020. "Mortgage loan regulation instruments around the world," Occasional Publications - Chapters in Edited Volumes, in: CNB Global Economic Outlook - July 2020, pages 13-19, Czech National Bank.
    2. Hodula, Martin & Melecký, Martin & Pfeifer, Lukáš & Szabo, Milan, 2023. "Cooling the mortgage loan market: The effect of borrower-based limits on new mortgage lending," Journal of International Money and Finance, Elsevier, vol. 132(C).
    3. Nitzan Tzur-Ilan, 2019. "Macroprudential Policy: Implementation, Effects, And Lessons," Israel Economic Review, Bank of Israel, vol. 17(1), pages 39-71.

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    More about this item

    Keywords

    LTV; mortgages; housing;
    All these keywords.

    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

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