33 Pages Posted: 15 Feb 2017
Date Written: February 15, 2017
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: 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