Two Extensive Margins of Credit and Loan-to-Value Policies

Abstract

We analyze a model of mortgage markets, housing tenure choice, heterogeneous agents, and default with closed form solutions. We uncover new insights which may inspire empirical work, and we ground already-established insights in a series of tractable expressions. Then we study optimal LTV regulation, and show that the choice of an LTV cap should balance the opposing forces of access to homeownership and the negative externalities associated with default. Homeownership affordability concerns induce procyclical elements into optimal regulation which attenuate the countercyclical regulation justified by the negative default externalities.

Keywords: Extensive Margin, Loan-to-Value, Mortgage Markets, Homeownership, Collateral

JEL Classification: G18, G21, G28, R21, R38