Loan to Value Caps and Government-Backed Mortgage Insurance: Loan-Level Evidence From Dutch Residential Mortgages

37 Pages Posted: 12 Sep 2019

See all articles by Leo de Haan

Leo de Haan

De Nederlandsche Bank

Mauro Mastrogiacomo

De Nederlansdche Bank (DNB); Vrije Universiteit Amsterdam, School of Business and Economics

Date Written: September 6, 2019

Abstract

Using loan level data on mortgage loans originated by Dutch banks during 1996 to 2015, we analyse the determinants of the incidence of non-performance. We find that both the originating loan-to-value ratio (OLTV) and the debt-service-to-income ratio (DSTI) are significantly positively associated with the probability of non-performance. The results suggest that mortgages with government-loan-guarantees perform better. Moreover, several mortgage loan and borrower characteristics, such as the (interest-only) loan type and the underwater status of the borrower, increase credit risk. Our model predictions suggest a novel policy implication: in order to avoid acceleration of non-performance probabilities, the OLTV-limit should be set to about 70%-80% for uninsured mortgages, and to about 90% for those with mortgage insurance.

Keywords: Credit risk, Mortgage loans, Loan to Value, Loan guarantees

JEL Classification: G20, G21, H81

Suggested Citation

de Haan, Leo and Mastrogiacomo, Mauro, Loan to Value Caps and Government-Backed Mortgage Insurance: Loan-Level Evidence From Dutch Residential Mortgages (September 6, 2019). De Nederlandsche Bank Working Paper No. 655. Available at SSRN: https://ssrn.com/abstract=3451231 or http://dx.doi.org/10.2139/ssrn.3451231

Leo de Haan

De Nederlandsche Bank ( email )

P.O. Box 98
1000 AB Amsterdam
Netherlands
+31 20 5243539 (Phone)
+31 20 5242514 (Fax)

Mauro Mastrogiacomo (Contact Author)

De Nederlansdche Bank (DNB) ( email )

PO Box 98
1000 AB Amsterdam
Amsterdam, 1000 AB
Netherlands

Vrije Universiteit Amsterdam, School of Business and Economics ( email )

De Boelelaan 1105
Amsterdam, 1081HV
Netherlands
+31(0)20 444 6037 (Phone)
+31(0)20 444 6004 (Fax)

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