The Impact of Regulation on Mortgage Risk: Evidence from India

Abstract

We employ loan-level data on over a million loans disbursed in India between 1995 and 2010 to understand how fast-changing regulation impacted mortgage lending and risk. Our paper uses changes in regulatory treatment discontinuities associated with loan size and leverage to detect regulation-induced loan delinquencies. We also …nd that an acceleration in the classi…cation of assets as non-performing resulted in substantially lower delinquency probabilities and losses given delinquency.We gratefully acknowledge an Indian mortgage provider for providing us with the data, and many employees of the Indian mortgage provider, Santosh

Loan-to-value policy and housing finance: Effects on constrained borrowers

“…This result is in line with Campbell et al (2015); that also find delinquency reduction after LTV policy using loan-level data, but novel for hard LTV limit policy.…”

“…As in Campbell et al (2015), we find that the hard-LTV policy introduced in Brazil reduced the delinquency levels of new housing loans taken by treated households. We also find that the policy had economically and statistically significant underlying effects on treated borrowers' housing choice.…”

“…Hallissey et al (2014) document the same effect in Ireland, where mortgages with higher LTV and loan-to-income (LTI) ratios at origination were more likely to be in arrears in the future. The empirical literature most closely related to this paper, Campbell et al (2015), find that risk weights conditional on LTV in India reduced loan delinquencies. Although these results suggest that hard LTV limits could reduce 6 This aspect is motivated by the report FSB principles for sound residential mortgage underwriting practices from April, 2012.…”

Endowment Effects in the Field: Evidence from India’s IPO Lotteries

“…13 As with many other details of regulation in the country, the Indian regulatory process for IPOs is quite complex. Several papers (e.g., Anagol and Kim, 2012;Campbell et al, 2015) have used this complexity of the Indian regulatory process to cleanly identify a range of economic phenomena.…”

The role of prepayment penalties in mortgage loans

“…Mortgage markets vary greatly across countries, and international comparisons can help policy makers to devise optimal regulation(Campbell, 2013;Jaffee, 2015). For example,Campbell et al (2015) analyze how changes in regulation impacted mortgage lending and risk in India; and Allen et al(2014)study the effect of bank mergers on the pricing of mortgages in Canada. More broadly, many countries have recently enacted reforms and introduced new regulations in markets for consumer financial products (Campbell et al, 2011a,b).…”