Macroprudential Policy and mortgage leverage decisions—Evidence from micro data

Abstract

This paper examines the behavioral responses of mortgage loan borrowers to Macroprudential Policy (MPP) its transmission channel, and the lag effect. We also explore the effectiveness of lender-based instruments Using borrower-level loan data from an Indian bank with a national presence from 2010 to 2021, we find that MPP tightening leads to a decline in borrower leverage. The impact is primarily channeled through downpayment changes rather than the cost of housing. The heterogeneous analysis reveals that the relaxation in MPP norms to promote affordable housing has helped middle-income groups in their mortgage decisions. A disaggregated analysis shows that risk weights have a stronger impact than LTV limits and provisioning requirements, suggesting that banks are capital-conscious in their lending decisions. Overall, the findings stress that MPPs, especially the timely intervention concerning risk weights have been effective in managing the borrowing risk thereby ensuring stability in the mortgage market.