Raising Household Leverage: Evidence from Co-financed Mortgages

61 Pages Posted: 1 Jun 2021 Last revised: 18 May 2022

See all articles by Stefano Colonnello

Stefano Colonnello

Ca Foscari University of Venice; Halle Institute for Economic Research

Mariela Dal Borgo

Bank of Mexico, Financial Stability Directorate

Date Written: May 14, 2022

Abstract

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

Colonnello, Stefano and Dal Borgo, Mariela, Raising Household Leverage: Evidence from Co-financed Mortgages (May 14, 2022). Available at SSRN: https://ssrn.com/abstract=3857163 or http://dx.doi.org/10.2139/ssrn.3857163

Stefano Colonnello

Ca Foscari University of Venice ( email )

Dorsoduro 3246
Venice, Veneto 30123
Italy

Halle Institute for Economic Research ( email )

P.O. Box 11 03 61
Kleine Maerkerstrasse 8
D-06017 Halle, 06108
Germany

Mariela Dal Borgo (Contact Author)

Bank of Mexico, Financial Stability Directorate ( email )

Av. 5 de Mayo 2
Mexico City, 06059
Mexico

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