Loan-to-Value Policy and Housing Finance: Effects on Constrained Borrowers

Abstract

This paper explores the effects on constrained borrowers of an LTV limit implemented on September 2013 on two major segments of housing finance in Brazil. LTV (hard) limits and related policies entail identification challenges, since constrained individuals are no longer directly observed after policy implementation. In this paper, partially observed treatment status is overcome by the use of an adjusted difference-in-difference method, focusing on the average treatment effect on the treated borrowers (i.e. those that would violate the LTV limit if allowed to do so). We use comprehensive loan-level data on mortgages augmented with a detailed and granular employment register. In the most affected segment, constrained individuals must meet the new LTV limit. These treated borrowers purchase more affordable homes and are less likely to be in arrears 12 months in the future. In the least affected segment, constrained borrowers also end-up meeting the new LTV limit, but the impacts are smaller and we find no significant effects on borrower's housing choice or morose debt.

Paper produced as part of the BIS Consultative Council for the Americas (CCA) research project on “The Impact of Macroprudential Policies: An Empirical Analysis Using Credit Registry Data” implemented by a Working Group of the CCA Consultative Group of Directors of Financial Stability (CGDFS).

Keywords: LTV, loan-to-value ratio, mortgage, credit register, housing loans, macroprudential policy

JEL Classification: G21, G28