Risk Heterogeneity and Credit Supply: Evidence from the Mortgage Market

Abstract

This paper uses a unique data set on more than 600,000 mortgage contracts to estimate a credit supply function which allows for riskheterogeneity. Non-linearity is modeled using quantile regressions. We propose an instrumental variable approach in which changes in the tax treatment of housing transactions are used as an instrument for loan demand. The results are suggestive of considerable risk heterogeneity with riskier borrowers penalized more for borrowing more.JEL Classification: D10, E21, G21

The determinants of foreclosures: Evidence from the Spanish case

“…Finally, the greater the spread, the higher the foreclosures‐to‐population ratio was. This finding is consistent with a common bank practice of using higher differentials to compensate higher LTV ratios (Besley et al ). Nevertheless, in the present case, the evidence at the individual level was weak and only for mortgages that used the Euribor as a benchmark interest rate.…”

Mortgage Debt and Entrepreneurship

“…The mortgage interest rate R M i also differs across individuals because it is determined by both the prevailing market rates and the borrower's characteristics, in particular the LTV-ratio of the mortgage (see evidence in Besley et al, 2013;Best et al, 2015).…”

“…In our empirical work, we proxy for the extent of an individual's mortgage burden by using the LTV on the outstanding loan. The evidence in Besley et al (2013) and Best et al (2015) shows that a borrower's LTV is among the most important determinants of the interest rate charged by the lender. Therefore our proxy captures the joint effect of M 0i and R M i…”

“…Refinancing decisions are common given the types of mortgages mainly available in the UK: contrary to the US, where 30-year fixed rate mortgages are very popular, mortgage contracts in the UK tend to have fixed rates between 2 and 5 years only and floating rates afterwards, making it potentially profitable to refinance at the end of the fixed rate period. At refinancing, it is likely that individuals with some savings will reduce their LTV: Besley et al (2013) and Best et al (2015) show that the LTV is among the most important determinants of the individual interest rate charged; by reducing their LTV, households can decrease their monthly payments. Obviously, at refinancing, a mortgage can also be increased and equity withdrawn.…”

Evidence on the Benefits of Alternative Mortgage Products

“…However, these data do not provide a measure of borrowers’ credit risk. In the United Kingdom, there is no single measure of credit risk that is widely used such as the FICO score (Besley, Meads, and Surico ()). Different lenders therefore construct and use different credit risk measures, and there is a lack of transparency with respect to how such measures are calculated and used.…”