Loan-to-value Research Articles

THE PREFERENCES FOR HOUSING LOAN DEMAND IN INDONESIA BEFORE AND AFTER THE LOAN-TO-VALUE POLICY CHANGE

The high price of houses causes a person to not be able to buy a home. The way that someone can own a house is by taking advantage of the credit offers provided by the bank. A mcroprudential policy needed that aims to overcome financial system instability, one of which is the policy on easing the loan-to-value (LTV) ratio for housing loans (KPR). The adjustment of LTV ratio aims to increase the potential demand for property, especially housing and household appliances, in line with an increase in the incomes of the lower middle class, and to control risks in the property sector. This study analyzes the impact of savings, loan interest rates, property sector NPLs, and the number of housing loans before and after a LTV policy revision. The data analysis used the Paired t-test, Wilcoxon signed-rank test, and multiple linear regression. The study results showed that there were differences between savings, loan interest rates, property sector NPLs, and the number of mortgages before and after a LTV policy change. Savings and NPLs in the property sector have no impact on the demand for housing loans while loan interest rates and LTV policy significantly affect the demand for housing loans.

Housing prices and macroprudential policies: Evidence from microdata

This paper examines the efficacy of macroprudential policies in addressing housing prices in a developing country like India, utilizing two novel databases on city-level house prices in India. Though the empirical models provide evidence of a sizable effect of the fundamental factors in influencing house price dynamics, they also reveal strong countercyclical properties of macroprudential tools i.e., loan-to-value (LTV) limit, risk weights, and provisioning requirements, in influencing housing price movements. Among the macroprudential policy tools, the LTV limit emerges as the most potent one in influencing the price dynamics. A granular investigation of the effectiveness of macroprudential tools suggests that the countercyclical effect of the regulatory ratios for large-sized mortgages is much stronger as compared with those for the small-sized mortgages, attributed mainly to investment motives associated with the large-sized loans. We also find the presence of asymmetry in the impact of loosening versus the tightening of the LTV limit, which can be attributed to the procyclical behavior of the house prices.

Loan-to-Value Regulations on Mortgages and the Use and Refinancing of Unsecured Debt

We study how loan-to-value (LTV) regulations on mortgages can change the use of unsecured debt and mortgage refinancing behaviors for households at or near the regulatory limits imposed. This study focuses on the differences in unsecured debt market participation between Norway and Sweden, where LTV regulations are in effect, and Denmark and earlier studies, where no LTV limits are imposed. We analyze the unsecured debt loan market using data from a repeated household survey from 2019 and 2021 with 4,010 and 3,023 respondents, respectively. We also explore mortgage lending and unsecured debt using a unique micro data set covering 7,385 Norwegian households. Our analysis shows that unsecured debt increases with LTV level but that households’ refinancing behaviors explain the lower increase in unsecured household debt at or near the regulatory limit for LTV on mortgages. We further demonstrate that an increasing number of households cannot refinance unsecured debt with mortgage debt. This lack of ability can lead to a rapid increase in the number of financially vulnerable households. We are the first to demonstrate that changes in different debt sources and refinancing patterns can increase the number of financially vulnerable households when LTV regulations are imposed solely on mortgage debt.

Appraisal bias in the lodging sector: Evidence from CMBS transactions

The main objective of this study is to investigate the size and direction of appraisal bias in the lodging sector. The hypothesis that appraisals of hotels are biased upwards is tested by comparing hotel appraisal prices (values) with their associated transaction prices in a sample of 480 hotel loans that were securitized by commercial mortgage-backed securities (CMBSs) between 2010 and 2019. The results of the study show an upward bias, and a significant negative effect of the loan-to-value (LTV) ratio on appraisal bias consistent with the observation that a decrease in leverage will increase appraisal bias. Additional findings reveal that an increase in appraisal bias is associated with an increased probability of default.

Multiple Credit Constraints and Time-Varying Macroeconomic Dynamics

I explore the implications of borrowers facing both loan-to-value (LTV) and debt-service-to-income (DTI) limits, using an estimated DSGE model. I identify when each constraint dominated over the period 1985-2021: The LTV constraint initially dominates, due to loose DTI standards, as well as low house prices around recessions. From 2012, tighter DTI standards and growing house prices have kept the DTI constraint binding. Whether a constraint binds shapes macroeconomic outcomes and the effectiveness of macroprudential tools. Finally, county panel data attest to multiple credit constraints as a source of nonlinear dynamics.

The impact of macroprudential policies on the transmission of shocks across financially integrated countries

AbstractWe study the implications of macroprudential policies across countries on the transmission of shocks when international investment activities are allowed. In a two‐country dynamic stochastic general equilibrium (DSGE) model in which international investors are borrowing constrained and pledge international assets, we introduce a time‐varying loan‐to‐value (LTV) ratio that adjusts to the variation of three different financial vulnerability indicators. We examine the effect of these policies on negative productivity and borrowing capacity shocks. Although time‐varying LTV ratios reduce the international propagation of the productivity shock, their response to the shock depends on the financial vulnerability indicator with which the LTV ratio changes. With a productivity shock, the adjustment of the LTV ratio to the deviation of credit or asset price helps to reverse the negative impact of the shock. With a financial shock, LTV ratios varying with a deviation of credit‐to‐GDP ratio or aggregate credit can mitigate the impact of a negative financial shock. Adjustment of the LTV ratios reduces the fluctuation of international investors' balance sheets, investment, and productivity. We find that countries improve their welfare when time‐varying LTV ratios are in place. The magnitude of the welfare gain differs with both the financial vulnerability indicator and the shock.

Policy Impact Analysis of Housing Policies Using Housing Cycles

In Korea, there is a big difference in the rise and fall of apartment prices by region, so it is expected that there will be differences in regional economic indexes. So, to capture the housing market conditions, we developed the housing cycle by using the factor-augmented vector autoregressive model (FAVAR). In addition, we estimated the impacts of the Korean government’s housing policies on the housing cycle. The first is a net policy effect model, and the second is a comprehensive model with macroeconomic variables and regional variables. To estimate the effects of the policies, we considered financial, tax, and housing transaction policies. In the net policy effect model, we found that all policies, including an increase in the DTI (debt to income) ratio, the LTV (loan to value) limit, an acquisition tax reduction, a transfer tax deregulation, deregulation of the housing subscription policy, and a housing purchase right transfer, impacted the housing cycles at the period t − 1. This is why the Korean government announced policy enforcement in advance a month ago before policy implementation. In the comprehensive model, we found that the policies had statistically significant effects on housing cycles at the period t − 1, and we also found that the regional variables had an influence on the housing cycle. Therefore, the Korean government should consider the regional characteristics and time lag when it attempts to intervene in the housing market.

Residential Mortgage Portfolio, Product Innovation and Performance of Commercial Banks in Kenya

This study sought to investigate the relationship between residential mortgage portfolios, product innovation, and performance of commercial banks in Kenya. The study was anchored on the Modern Portfolio Theory, Agency Theory, and Asymmetric Information Theory. The study adopted a correlational descriptive research design and data collected from the annual residential mortgage surveys conducted by the central bank of Kenya (CBK) on commercial banks covering a 13-year period from 2006 to 2018. Further, the financial statements of commercial banks and Kenya Bankers Association database were used as a source of secondary data. Data were analyzed via panel data approaches. The Baron and Kenny (1986) approach was used to test the hypothesis. The results revealed that residential mortgage portfolio attributes, namely: portfolio quality and mortgage interest return significantly influence bank performance. The effect of mortgage terms on the relationship between mortgage portfolio quality and performance was negative and statistically significant. Loan to value (LTV) ratio was however found not to significantly intervene in the relationship between residential mortgage portfolios and the performance of banks operating in Kenya. From the findings, the study suggested that bank managers pay attention to the institutional environment and product characteristics in designing their mortgage loan portfolios.

Modelling credit spreads on commercial mortgage loans

PurposeThis paper offers empirical evidence on factors influencing credit spreads on commercial mortgage loans. It extends existing work on the pricing of commercial mortgage loans. The authors examine the relative significance of a range of factors on loan pricing that are lender, asset and loan specific. The research explores and quantifies the sources of spread differentials among commercial mortgage loans. The paper contributes to a limited literature on the subject and serves the purpose of price discovery in commercial property lending. It offers a framework to compare actual pricing with fundamental-based estimates of loan spreads.Design/methodology/approachPanel analysis is deployed to examine the cross-section and time-series determinants of commercial mortgage loan margins and credit spreads. Using an exclusive database of loan portfolios in the United Kingdom (UK), the panel analysis enables the authors to analyse and quantify the impact of a number of theory-consistent and plausible factors determining the cost of lending to commercial real estate (CRE), including type and origin of lender, loan size, loan to value (LTV) and characteristics of asset financed – type, location and grade.FindingsSpreads on commercial mortgages and, therefore, loan pricing differ by the type of lender – bank, insurance company and debt fund. The property sector is another significant risk factor lenders price in. The LTV ratio has increased in importance since 2012. Prior to global financial crisis (GFC), lenders made little distinction in pricing different LTVs. Loans secured in secondary assets command a higher premium of 50–60bps. The analysis establishes an average premium of 35bps for loans advanced in regions compared to London. London is particularly seen a less risky region for loan advancements in the post-GFC era.Research limitations/implicationsThe study considers the role of lender characteristics and the changing regulation in the pricing of commercial mortgage loans and provides a framework to study spreads or pricing in this market that can include additional fundamental influences, such as terms of individual loans. The ultimate aim of such research is to assess whether mortgage loans are correctly priced and spotting risks emanating from actual loan spreads being lower than fundamental-based spreads pointing to tight pricing and over-lending.Practical implicationsThe analysis provides evidence on lender criteria that determine the cost of loans. The study confirms that differences in regulation affect loan pricing. The regulatory impact is most visible in the increased significance of LTV. In that sense, regulation has been effective in restricting lending at high LTV levels.Originality/valueThe paper exploits a database of a commercial mortgage loan portfolio to make loan pricing more transparent to the different types of lender and borrowers. Lenders can use the estimates to assess whether commercial loans are fairly priced. Borrowers better understand the relative significance of risk factors affecting margins and the price they are charged. The results of this paper are of value to regulators as they can assist to understand the determinants of loan margins and gauge conditions in the lending market.

What is the impact of macroprudential regulations on the Swedish housing market?

Housing shortages and urbanization have led to higher house prices and higher levels of household debt. Sweden's Financial Supervisory Authority has introduced several borrower-based, macroprudential tools to control debt growth over the last ten years. In 2010, a mortgage loan-to-value (LTV) ratio was introduced, and in 2016, the amortization of 1 percent of the loan balance was mandated by law if a mortgage's value was higher than 50 percent of the property value. Furthermore, in 2018, the amortization requirement was tightened, as all households with a mortgage valued at larger than 4.5 times their annual income were forced to be amortized by 1 percent of the loan balance. The question is whether the Financial Supervisory Authority's macroprudential tools have exerted the intended effect. We combine a hedonic regression modeling approach with a regression discontinuity design (RDD) to estimate the causal impact on house prices. The effect of these macroprudential tools is estimated on the single-family housing market and the condominium market. We are using microdata of one million housing transactions between 2008 and 2019. Our estimates indicate that the amortization requirement in 2016 resulted in a negative impact of around 7 percent on housing prices but that a slightly lower impact resulted from the 2018 amortization requirement. The 2010 LTV ratio requirement did not impact the prices of dwellings.

Macroprudential Policy, Financial Crisis, and Macroeconomic Policy (Case Study In 5 Asean Countries)

This study will examine two aspects, the first is the impact of macroprudential policy on the potential for a financial crisis, then the link between macroprudential policy and macroeconomic policy (monetary policy, exchange rate regime and capital control). This research will involve 5 (five) ASEAN countries as samples, namely Indonesia, Malaysia, Thailand, Vietnam and Singapore. The data used are annual data starting from 2004 to 2020. The variable used in this study is the loan-to-value (LTV) variable as a variable that describes macroprudential policy, then GDP growth rate, income per capita, inflation rate (consumer price). index), and changes in monetary policy (real interest rate). The analytical tool used in this research is the probit model. The results showed that macroprudential policies had an effect on controlling the financial crisis. Macroprudential policy is considered effective in avoiding a banking crisis by suppressing credit growth. In other words, it is found that a tightening of the LTV ratio is significantly associated with a lower probability of a banking crisis Keywords: macroprudential policy, monetary policy, exchange rate regime and capital control. DOI: 10.7176/JESD/13-7-08 Publication date: April 30 th 2022

Effects of Macroprudential Policies on Bank Lending and Credit Risks

I analyse the effects of two macroprudential policy measures implemented in Switzerland: the activation of the countercyclical capital buffer (CCyB) and a cap on the loan-to-value (LTV) ratios. I use a difference-in-differences method to estimate the effects of these measures on risk indicators, such as their LTV and loan-to-income (LTI) ratios and mortgage growth rates. I find that both the CCyB and the LTV cap led to a reduction in high LTV mortgages. The banks affected by the CCyB also reduced their mortgage growth rates. I do not find any evidence that these measures had unintended consequences on LTI risks, other measures of mortgage lending standards, or non-mortgage credit growth.

Practical Applications of The Lowdown on Low-Down-Payment Mortgages: Is It Safe?

In <b><i>The Lowdown on Low-Down-Payment Mortgages: Is It Safe?</i></b>, from the Summer 2021 issue of <b><i>The Journal of Fixed Income</i></b>, authors <b>Gary Fissel</b>, an independent consultant, and <b>Gerald Hanweck</b> and <b>Anthony Sanders</b> of the <b>School of Business at George Mason University</b> address the key drivers of mortgage loan default around the time of the 2007–2009 financial crisis. Using substantial individual mortgage data from the period of 2000 to 2008, the authors developed a model for evaluating the significance of various factors in explaining and predicting changes in the status of mortgage delinquencies and whether they became more severely delinquent or recovered. The model includes factors such as initial borrower and mortgage characteristics, county-level employment, and housing markets. Based on their application of the model, the authors found that the dominant factors in delinquencies are initial borrower and mortgage characteristics such as the loan-to-value (LTV) ratio, documentation of borrower income and assets, and borrower credit scores (FICO scores).

Housing loan default in Malaysia: an analytical insight and policy implications

PurposeThe purpose of this paper is to examine the drivers of default in the Malaysian housing market in the light of various policy interventions by the country’s central bank, and the government’s expressed concern to ensure balanced growth in the market. This paper assesses the importance of considering the endogeneity of loan-to-value (LTV) in predicting housing loan default and its implications.Design/methodology/approachIn this paper, the author addresses the endogeneity problem in the LTV variable using two instrumental variables (IV) in this probit regression: national residential property gains tax and the statutory reserve ratio of Bank Negara Malaysia. This study uses the instrumental variable probit model to consider endogeneity bias. This study assumes a latent (unobservable) variable (Y*), representing a borrower’s tendency to default, which is associated linearly with the borrower’s and loan characteristics and other variables (Xi). This study uses individual borrower-level information of 43,156 housing loan borrowers from the files of a well-established housing bank in Malaysia.FindingsThis study’s results confirm that endogeneity causes a substantial difference in the magnitude of the estimated effects of LTV on the default tendency. At the lower values of LTV, the probability of default is over-estimated, and at the higher values, the default probability is substantially underestimated. Endogeneity bias also affects the estimated coefficients of loan and borrower characteristics. The authors find that the interest rate is less relevant in predicting loan default. Other loan characteristics, such as loan age, tenure, payment amount and the built-up area, are relevant. This study’s result confirms that the borrower’s location matters, and an increase in state gross domestic product per capita and an increase in the supply of residential units reduce default probability.Research limitations/implicationsThe present study did not explore the applicability of the “equity theory of default” in the Malaysian housing market. This study did not assess “strategic default” issues and the effect of borrowers’ characteristics, personality traits and self-control of Malaysian housing loan borrowers in the mortgage decision-making process. The evolving dynamics of the Malaysian housing market microstructure in property valuation remained unexplored in the present study.Practical implicationsThe findings have crucial relevance in the decision-making process of commercial banks, the central bank and the government to frame policies to foster balanced growth and development in the housing market. The authors argue that striking a subtle balance between the concerns of financial stability and productive risk-taking by commercial banks in Malaysia remains a continuing challenge for the country’s central bank. The authors also argue that designing suitable taxation policies by the government can deliver its cherished goal of balanced development in the housing market.Originality/valueEmpirical research on the Malaysian housing market based on micro-level data is scarce due to a paucity of relevant data. This study is based on the individual borrower-level information of 43,156 housing loan borrowers from the files of a well-established housing bank in Malaysia. In this analysis, the authors find clear evidence of endogeneity in LTV and argue that any attempts to decipher the default drivers of housing loans without addressing the issue of endogeneity may lead to faulty interpretation. Therefore, this study is unique in recognizing endogeneity and has gone deeper in identifying the default drivers in the Malaysian housing market not addressed by earlier papers.

Risk differentials between green and brown assets?

We examine the relative riskiness of residential mortgages depending on the energy efficiency of the underlying property. Using a unique micro-level dataset in the UK, our analyses suggest that mortgages against energy-efficient properties are less frequently in payment arrears than mortgages against energy-inefficient properties. This result is robust to controlling for other relevant determinants of mortgage default including borrower income and loan-to-value (LTV). We conclude that the energy efficiency of a property is a relevant predictor of mortgage payment arrears. This result adds to the evidence base on risk differentials between green and brown assets.

Housing debt and elderly housing tenure choices

AbstractWe examine the impact of financial leverage, measured by the loan‐to‐value (LTV) ratios , on elderly homeowners' mobility and housing tenure choices. Using a 1999–2019 sample from the Panel Study of Income Dynamics (PSID), we find that a higher LTV ratio substantially increases an elderly homeowner's likelihood of exiting homeownership. In particular, elderly homeowners with an LTV ratio greater than 80% are more than four times likely to exit homeownership than their debt‐free counterparts. By distinguishing recent leverage changes either from house price movement or from equity extraction/injection, we further find that the impact of financial leverage is path‐dependent. Holding the LTV ratio constant, elderly homeowners are less likely to depart from homeownership if they recently extracted equity from their homes. In addition, we find both financial constraint and long‐term indebtedness are important in predicting the likelihood of elderly homeowners exiting homeownership. We further extend our analysis by exploring the effect of the housing market cycle and find the relationship between financial leverage and elderly tenure choices varies across different stages of the cycle. Our findings have several important implications. They not only point to a linkage between housing and mortgage/rental markets but also help to explain the limited size of the U.S. reverse mortgage market.

Penalty interest rates, LTV constraints, and screening laxity in mortgage markets

This study investigates the economic role of penalty interest rates with respect to lenders’ incentive structure toward borrower defaults in mortgage markets. We model a bank’s credit rationing problem with two strategies, screening out bad loans and risk-based pricing, and show that the bank’s strategies vary with the environment of penalty interest rates and loan-to-value (LTV) ratios. As low LTV ratios indicate sufficient buffer between the debt and the collateral value, the lenders could be over-compensated from the default if they are allowed to charge a penalty interest rate exceeding the administrative cost of default. Our findings suggest that tightening LTV constraints while leaving regulations on penalty interest rates relaxed can unexpectedly undermine lenders’ voluntary willingness to monitor and prevent mortgage defaults.

Can Social Capital Variables Help to Determine Loan to Value Approved by Banks?

This paper sheds some light on the effects of social capital variables (social network data, physical appearance, etc.) on loan-to-value (LTV), a crucial variable to evaluate systemic risk. Using a unique database created by merging several sources of data, we show that the introduction of social capital variables are shown to be statistically significantly related to LTV. In particular, Facebook likes in a month and creditworthiness are a negative determinant of LTV while beauty and certain personality traits play a role in borrowers obtaining a higher LTV. We distinguish these effects depending on the LTV variable used: loan-to-appraisal (entirely under the control of lender) and loan-to-transaction (in which the transaction price can also be influenced). As policy implications we found that social capital variables capture information that would otherwise be unobservable using only the traditional variables in the sense that they are related to information lenders may have at lending that the researchers do not observe.

The effect of hotel brand affiliation on commercial mortgage loan underwriting in the lodging sector

The main purpose of this study is to investigate the influence of hotel brand affiliation on commercial mortgage loan underwriting. Using a sample of 2443 hotel loans securitized into commercial mortgage-backed securities (CMBS) between 2010 and 2018, the results of this study show a significant effect of hotel brand affiliation on credit spreads, loan-to-value (LTV) and debt coverage ratios (DSCR). More importantly, there is a significant interaction effect between hotel brand and lending on credit spreads. The evidence is consistent with the observation that some hotel brands are less risky than other hotel brands, and therefore, receive favorable lending terms from lenders.

House Price Dynamics, Optimal Ltv Limits and the Liquidity Trap

The inception of macro-prudential policy frameworks in the wake of the global financial crisis raises questions about the effects of the newly available policy tools and their interaction with the existing ones. We study the optimal setting of a loan-to-value (LTV) limit, and its implications for optimal monetary policy, in a model with nominal rigidities and financial frictions. The welfare-based loss function implies a role for macro-prudential policy to enhance risk-sharing. Following a house price boom-bust episode, macro-prudential policy alleviates debt-deleveraging dynamics and prevents the economy from falling into a liquidity trap. In this scenario, optimal policy always entails countercyclical LTV limits, while the response of the nominal interest rate depends on the nature of the underlying shock driving house prices.