With (More Than) a Little Help from My Bank. Loan-to-Value Ratios and Access to Mortgages in Italy

Abstract

This paper provides a framework to look at the affordability both of the regular repayment of housing debt (an income constraint) and of the initial deposit (a budget constraint). Analysis of the microdata on Italian households in the period 2006-2012 indicates that the improved capability of households to maintain their mortgage repayments was counterbalanced by tighter budget constraints. The framework can be employed as a tool to assess the impact of macroprudential policies, such as caps on loan-to-value ratios (LTVs), on the pool of households who can access mortgage loans without running into financial distress: the level and the slope of the 'mortgage affordability curve', the curve that shows the share of eligible households at different LTVs provided by the banks, change over time and depend on the definition of household wealth. The 2008-09 crisis lowered the share of eligible families at high LTVs and slightly increased it at lower LTVs. Moreover, we find that mortgage capability worsened more for the middle class and that the decline in Italian LTVs across the period was mainly supply driven, whereas household preferences barely changed. Finally, alternative policies affecting mortgage affordability display heterogeneous effects both in increasing households' market participation and in fostering safer lending policies.

The cost of steering in financial markets: Evidence from the mortgage market

“…For this reason we do not include in our analysis the risk of default and also abstract from sophisticated pricing policies conditioning the mortgage rate offered on individual characteristics. In fact, banks submit applications to severe screening to minimize the default risk but then tend to ignore differences in accepted borrowers riskiness setting flat rates, with the exception of a recent attention to loan size or LTV (Liberati and Vacca (2016)).…”

The supply side of product differentiation in the Italian mortgage market

“…The diversification process in the Italian mortgage market might have been held back during the double crisis that hit the Italian economy in the recent years: the 2007-2008 global financial crisis (hereafter Great Recession) and the 2010-2012 Eurozone sovereign debt crisis (hereafter Sovereign Debt Crisis). According to Liberati and Vacca (2016), the decline in mortgage affordability after the Great Recession (especially because of lower LTV ratios) was mainly supply driven, whereas household preferences barely changed. The decrease in the amount of new mortgages granted in that period was particularly severe for younger clients, to whom banks frequently grant loans with higher LTV ratios and longer maturities, because of selective lending policies (Felici et al, 2012).…”