The Effectiveness of Housing Collateral Tightening Policy

33 Pages Posted: 15 Feb 2017  

Sumit Agarwal

Georgetown University - Department of Finance

Cristian Badarinza

National University of Singapore (NUS)

Wenlan Qian

National University of Singapore - NUS Business School

Date Written: February 15, 2017

Abstract

We show that credit supply restrictions can lead to adverse selection in the market for mortgage loans. We exploit a unique policy experiment that tightens collateral requirements for second homes, and document a composition change towards riskier borrowers that are 5 percentage points more likely to become delinquent. This phenomenon results from the profit maximization motive of banks, which respond optimally to the excess funding liquidity. Our results are important for the design of policy packages, suggesting that collateral tightening should be complemented with measures that target the balance sheet positions of borrowers directly.

Keywords: credit supply, mortgage market, household finance

Suggested Citation

Agarwal, Sumit and Badarinza, Cristian and Qian, Wenlan, The Effectiveness of Housing Collateral Tightening Policy (February 15, 2017). Available at SSRN: https://ssrn.com/abstract=2917308 or http://dx.doi.org/10.2139/ssrn.2917308

Sumit Agarwal

Georgetown University - Department of Finance ( email )

3700 O Street, NW
Washington, DC 20057
United States
202-687-8207 (Phone)

HOME PAGE: http://www.ushakrisna.com

Cristian Badarinza (Contact Author)

National University of Singapore (NUS) ( email )

Bukit Timah Road 469 G
Singapore, 117591
Singapore

Wenlan Qian

National University of Singapore - NUS Business School ( email )

15 Kent Ridge Drive
Singapore 117592, 119245
Singapore
(65) 65163015 (Phone)

HOME PAGE: http://sites.google.com/site/wenlanqian/

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