Raising Household Leverage: Evidence from Co-financed Mortgages
63 Pages Posted: 1 Jun 2021 Last revised: 3 Jul 2022
Date Written: July 1, 2022
Easing borrowing constraints, a major barrier to home ownership, can have negative implications for default risk. This article provides evidence on this issue by studying the impact of increasing borrowers' credit capacity through a large co-financing scheme in Mexico. Co-financed mortgages combine a bank loan and another from a housing provident fund (HPF) that benefits from a secure repayment system. Relative to traditional bank mortgages, we find that the co-financed come with substantially lower down payments, by 7.6 percentage points, but with no differences in the average values of purchased properties. Despite their higher leverage, co-financed bank mortgages are not more likely to default given the lower liquidity requirements for upfront costs and loan payments. From a distributional standpoint, they reduce down payments more at lower incomes, especially when banks are smaller. Larger banks, whose business models capture a greater share of low-income borrowers, use co-financing to reduce the amount lent and, hence, their exposure to such riskier segments.
Keywords: Residential Mortgages, Co-Financing, Housing Provident Fund, Household Leverage, Default
JEL Classification: D04, D14, G21, G51, H81, O16
Suggested Citation: Suggested Citation