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

46 Pages Posted: 2 Jan 2015 Last revised: 24 May 2017

See all articles by Pedro Gete

Pedro Gete

IE Business School; IE University

Michael Reher

University of California, San Diego (UCSD) - Rady School of Management

Date Written: November 2015

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

Suggested Citation

Gete, Pedro and Reher, Michael, Two Extensive Margins of Credit and Loan-to-Value Policies (November 2015). Journal of Money, Credit, and Banking Vol. 48, No. 7 (October 2016), Available at SSRN: https://ssrn.com/abstract=2544274 or http://dx.doi.org/10.2139/ssrn.2544274

Pedro Gete (Contact Author)

IE Business School

Calle Maria de Molina 12, Bajo
Madrid, Madrid 28006
Spain

IE University ( email )

Calle Pedro de Valdivia 21
Madrid, Madrid 28006
Spain

Michael Reher

University of California, San Diego (UCSD) - Rady School of Management ( email )

9500 Gilman Drive
Rady School of Management
La Jolla, CA 92093
United States

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