Speculative Lending in Mortgage Loan Market: A Macroeconomic Analysis

Abstract

This paper critically examines the link between the loan market and the housing market that works through mortgage loans. Repayment of such mortgage loans depends on the future earning potential of the borrowers, which in turn depends on the overall state of the macro economy. Under buoyant macroeconomic conditions, all borrowers pay back their loans and both the loan market and the housing market function well. However, a temporary income shock in the economy, which undermines the repayment ability of the borrowers, may result in speculative lending by banks thereby leading to a crisis. This calls for strict monitoring of mortgage loans by regulatory authorities.