Loan-to-value Research Articles

Geographic disparities in bank lending: Evidence from an auto loan market

We investigate geographic biases against nonlocal borrowers in the Chinese auto loan market. Using proprietary loan-level data from a major commercial bank in a regional market, we discover that nonlocal borrowers encounter geographic discrimination, manifested in higher loan rates and shorter loan durations compared to similar local counterparts, even after adjusting for borrowers' risk profiles. This bias is exacerbated by information asymmetries as well as economic and institutional stereotypes. The disparity is particularly pronounced in cases involving elevated loan-to-value (LTV) ratios, higher-value or luxury vehicles, and among male or older borrowers. Our findings shed light on the human biases in lending decisions in the credit market.

The effects of macroprudential policies on house prices: Evidence from non-ordinary house purchasing policy using China real transaction data

This paper contributes to the international policy debate on the effect of macroprudential policy on housing prices. Our identification relies on the fact that ordinary housing and non-ordinary housing in Beijing face different loan-to-value (LTV) restrictions and transaction tax rates. This paper uses regression discontinuity (RD) design to test whether the differentiated regulation of ordinary housing and non-ordinary housing caused a discontinuous change in housing prices with house-level transaction data. We find that housing prices have a significant discontinuous decline at the cutoff point caused by macroprudential policy, which we take 140 square meters since it is the identification standard of non-ordinary housing. Further, we carry out RD-DID analysis to investigate the influence of loan-to-value (LTV) restrictions on housing prices. We find that around 2% decline in house prices is caused by credit policy.

Impact of Covid-19 Vaccination and Financial Policies on Indonesia’s Property Loan Growth

Research Originality: This study provides a novel examination of the impact of COVID-19-related financial policies on property loan growth in Indonesia, a critical area with limited prior quantitative research.Research Objectives: The purpose of this research is to assess how interventions such as Loan-to-Value (LTV) over Finance-to-Value (FTV) ratio (LTV/FTV) relaxation, COVID-19 vaccination as a metric for public activity restrictions, and changes in deposit insurance rates have influenced property loan dynamics during the pandemic.Research Methods: Using monthly banking data from January 2016 to May 2022, this study employs ARIMA Intervention Analysis to capture the effects of these policies.Empirical Results: The empirical results reveal a significant positive shift in property loan growth ten months after the first intervention and a notable impact two months after the third intervention, whereas the second intervention shows limited influence.Implications: These findings imply that integrating COVID-19 vaccination targets into public policy and adjusting deposit insurance rates are effective strategies for sustaining the property loan sector during economic crises. These results provide insights into the role of vaccination targets and financial adjustments in supporting the property loan sector during economic disruptions, offering valuable considerations for future policymaking in similar contexts.JEL Classification: C22, C51, C52, C53, C54

Loan-to-value ratio and uncertainty

ABSTRACT We examine how uncertainty affects the loan-to-value (LTV) ratio, with a focus on identifying which types of uncertainty – such as those related to macroeconomy, financial market, housing market, and economic policy – are most impactful, using a VAR model. Our finding reveals that the LTV ratio declines in response to increased uncertainty, suggesting that uncertainty plays a significant role in shaping the LTV ratio. Notably, uncertainties in the financial and housing markets substantially decrease the LTV ratio for newly originated mortgage loans, challenging the exogenous collateral constraint framework. Additionally, it shows delayed and hump-shaped responses. These results differ from theoretical predictions.

Pandemic shocks and macroprudential policy

Abstract We introduce an extended borrower–saver DSGE (Dynamic Stochastic General Equilibrium) model, where classifications of occupations are split further into two subcategories, according to whether their occupation is directly “affected” by a pandemic shock. We find that, contrary to the standard literature, during a pandemic shock an increase in the Loan-to-Value (LTV) ratio can increase social welfare and make all four agent types (borrowers affected, borrowers non-affected, savers affected, and savers non-affected) better off. Countercyclical optimal LTV rules are shown to increase social welfare, with savers gaining at the expense of borrowers, including those mostly affected by the pandemic. An interest rate mortgage subsidy to those worst affected (“affected” mortgage borrowers), in coordination with stricter monetary and LTV policy, are shown to increase both social welfare and the welfare of borrowers and savers affected by the pandemic.

Implementation of Loan to Value Easing Policy and Efforts to Overcome Problem Property Credit

The function of national banking is not only as a forum for collecting and distributing public funds or as an intermediary for savers and borrowers (investors) but also to improve people's living standards; one of these efforts is to provide various types of Credit, one of which is property credit. One of Bank Indonesia's efforts is to provide relief by increasing the loan to value (LTV) ratio for the lower middle class. Based on this background, this article examines and analyzes the considerations for issuing macroprudential policies regarding loan to value relaxation on property loans and the efforts banks should make to handle problem loans. This type of research is empirical legal research because it examines the considerations for issuing macroprudential policies regarding loan to value relaxation on property loans and the efforts banks should make to handle problem loans. PT. State Savings Bank (Persero) Tbk. Applying a maximum limit differs from Bank Indonesia Regulations because banking upholds the principle of prudence.

Do macroprudential measures increase inequality? Evidence from the euro area household survey

AbstractBorrower‐based macroprudential policies—such as caps on loan‐to‐value (LTV) ratios and debt‐service‐to‐income (DSTI) limits—contain the build‐up of systemic risk by reducing the probability and conditional impact of a crisis. While LTV/DSTI limits can increase inequality at introduction, they can dampen the increase in inequality under adverse macroeconomic conditions. The relative size of these opposing effects is an empirical question. We conduct counterfactual simulations under different macroeconomic and macroprudential policy scenarios using granular income and wealth data from the Households Finance and Consumption Survey for Ireland, Italy, Netherlands and Portugal. Simulation results show that borrower‐based measures are associated with a moderate increase in wealth inequality, while the impact on income inequality is negligible.

The blind spot in residential mortgages: Increasing default option value in the face of declining house prices

The interest rate hikes intended to combat inflation have not only significantly increased mortgage payments, but also significantly depressed house prices. The probability of default for mortgages is typically estimated through the debt servicing ability of the obligor. The alternative estimation based on the default option, although well studied in literature, is typically not used by practitioners. This option is normally ‘deep out of money’ and moves in the money if the loan to value (LTV) increases significantly, even creating negative equity. This is typically a remote probability due to the down payment requirements, but not as much under the current environment, where the house price depreciation has significantly increased LTVs, especially for newer mortgages underwritten when house prices were at their peak. This paper discusses the potential risk management oversights in this environment, illustrating that the increasing default risk is not adequately captured in probability of default (PD) models based on debt servicing ability alone. This is also true for the loss given default (LGD) risk if the contemporaneous LTV effects are not captured. Numerical examples are provided to demonstrate the material increase in PD, LGD and the combined expected loss risk with increasing LTV. It also discusses an alternative default option PD model, its calibration and its usage for stress testing along with LGD modelling, which together capture the contemporaneous LTV effects.

Analyzing monetary policies and bank credit in Indonesia’s provincial clusters amidst COVID-19 pandemic

This research investigates the impact of monetary policy instruments employed by the Bank of Indonesia (BI), including reserve requirement (GWM), policy rate, and loan-to-value (LTV) ratio, on bank credit by sector in Indonesia. We utilize FMOLS and DOLS techniques to estimate the effects of policy instruments and COVID-19 variables on bank credit across six clusters of provinces. Our findings indicate that the GWM exhibits a negative impact, while the policy rate positively influences bank credit in all non-household sectors in Indonesia. The LTV instrument significantly affects bank credit in household sectors. Furthermore, The Covid-19 pandemic’s influence on the relationship between each policy instrument and bank credit varies across economic sectors and provincial clusters. We recommend BI to utilize the GWM and LTV instruments more frequently and exercise caution in reducing the policy rate to very low levels, as excessively low interest rates may not incentivize banks to increase lending.

Wealth inequality and the distributional effects of maximum loan-to-value ratio policy

Macroprudential policy improves economic outcomes by reducing the likelihood and severity of financial crises. Yet, are there unintended long run consequences to the introduction of a macroprudential policy regime, and are they conditional on the level of wealth inequality? I answer these questions by looking at the effect of a reduction in the maximum loan-to-value (LTV) ratio on homeownership rates, house prices and housing wealth inequality across two economies with different initial wealth dispersion. I use a heterogeneous agent model in which households face an endogenous borrowing limit in the form of a collateral constraint. A reduction in the LTV limit tightens the borrowing constraint and changes the levels of wealth at which households rent or become constrained or unconstrained owners. The key finding of this paper is that initial conditions matter; a greater share of households is affected when wealth is distributed more equally. This larger impact on aggregate demand leads to a stronger fall in house prices and a larger rise in the share of constrained homeowners and housing wealth inequality. The effects are also non-linear in the LTV ratio, with progressively stronger effects at lower LTV ratios.

Housing leverage, home value, and retirement

AbstractWe study the effect of housing leverage, measured using the loan‐to‐value (LTV) ratio, on homeowners' retirement decisions. We find that in general, elevated LTV ratios delay retirements. By decomposing the changes of the current LTV ratio into (1) equity extractions, (2) equity build‐up, (3) home value increases, and (4) home value decreases, we find that equity extractions and declining home value drive the negative relationship between housing leverage and retirement. In contrast, retirement decisions are less responsive to equity build‐up and home value appreciation. Our results suggest that the influence of housing leverage on retirement decisions is path‐dependent and asymmetric. We also find that transitions into retirement are more sensitive to home price declines, and retirement reversals are often triggered by equity extraction. Further analyses also reveal that the impact of housing leverage on retirement differs by household age and financial constraints, and it also varies across different stages of a housing market cycle.

Discounted Cash Flow Analysis and Prudential Value DCFA Formula

According to IVS 2023 the terminal value of a DCFA can be calculated in respect of the three fundamental appraisal approach: market, income and cost. Specifically, “Where the asset is expected to continue beyond the explicit forecast period, valuers must estimate the value of the asset at the end of that period. The terminal value is then discounted back to the valuation date, normally using the same discount rate as applied to the forecast cash flow” (IVS 105 Valuation Approaches and Methods, para 50.20). Although academic and professional normally refer to direct capitalization to calculate the exit value (scrap value, going out value) different approaches are possible. In particular it is possible to calculate the exit value using the market approach. The present work starts from an original model of Discounted Cash Flow Analysis proposed by Simonotti (2006) to propose possible alternative to the original formula. The model proposed, as defined for the paper “Prudential Value DCFA Formula (PVF)” provides methodological alternatives to the original model in order to apply the method in different property market conditions allowing the appraiser to represent even property market in recovery or falling market phase, or prudential assessment of worth and opinion of value. In particular the proposed model replace the compound growth of the property value included in the traditional Simonotti’s model, with a linear growth or even a combination of both. The paper emphasize how property valuation standards can not be considered as immutable but they may be considered in constant evolution. In delivering an opinion of value for mortgage lending purposes the approach of professional academician and real estate analyst need to be able to respond to change of external conditions, in consideration of the sustainability of the cash flows in the long term, for the entire duration of the loan (and therefore for the purpose of identifying the long-term sustainable value of the asset). The approach is functional, inter alia, for the purpose of identifying the “prudential value” as defined by the innovative banking regulation (Basel 3) according to the definition of loan-to-value (LTV) ratio for loan origination and monitoring.

The impact of a macroprudential borrower-based measure on households’ leverage and housing choices

This paper investigates the impact of changes in lending limits on household leverage and housing choices. Using credit registry data and a difference-in-differences estimation strategy we determine how a change in the loan-to-value (LTV) ratio - a macroprudential policy tool - affected constrained households. Our results show that the policy change was effective in reducing households' leverage as constrained households took out smaller loans and had lower loan-to-income ratios. Such households also paid higher interest rate spreads and had higher loan-service-to-income ratios than the control group. Finally, we also show that the policy change affected households' housing choices, as constrained households bought less expensive houses. Our results highlight the improvement of the risk profile of households following the introduction of the LTV limits.

The real effects of borrower-based macroprudential policy: Evidence from administrative household-level data

We analyze the effects of borrower-based macroprudential policy at the household level. We exploit administrative Dutch tax and housing records in conjunction with the introduction of a mortgage loan-to-value (LTV) limit. We find that the regulation sharply reduces mortgage leverage with bunching at the LTV limit. While (regulation) affected households reduce total leverage and interest expenses, they also decrease cash balances to satisfy the LTV limit, generating an important solvency-liquidity trade-off. Nevertheless, affected households experience less financial distress after the introduction of the LTV regulation. Moreover, these households experience better liquidity management and smoother consumption following income loss. Overall, our results highlight the key financial stability and real effects of borrower-based macroprudential policy.

Contradictory Results: Reassessing the Impact of Loan‐to‐Value Restrictions on House Price Inflation

AbstractUsing Bayesian Structural Time Series analysis, this study examines the causal impact of loan‐to‐value (LTV) restrictions imposed by the Reserve Bank of New Zealand in October 2013. By incorporating state‐space components, such as local linear trend, seasonality and regression, counterfactual values of house price indices are predicted. Surprisingly, the study reveals that the implementation of LTV restrictions had no significant effect on national house price indices, contradicting prior Central Bank studies that reported a nearly 3 percentage‐point decrease in housing cost inflation. This contradictory evidence challenges existing perceptions of the effectiveness of LTV restrictions in curbing house price inflation.

Does Personal Financial Distress Affect Workers’ Performance? Evidence From Real Estate Agents

This study examines how personal financial distress affects workers’ performance. Using the real estate brokerage industry as a setting and personal bankruptcy filing as a proxy for personal financial distress, we find that sale prices of agent-represented houses are lower in the year when agents are financially distressed than the non-distressed year, relative to the control group. We also find that the less desirable sales’ outcomes induced by distressed agents spill over to homeowners’ future buying activities. These owners subsequently buy houses with higher loan-to-value (LTV) ratios in lower-quality neighborhoods.

Borrower-based measures, house prices and household debt

This paper quantifies the credit-driven housing demand and the role of macro-prudential Loan-to-Income (LTI) and Loan-to-Value (LTV) limits. Using granular and time-varying changes in borrowing capacity, I estimate how shocks in credit availability feed into credit demand and affect household debt. The findings indicate a robust relationship between debt and borrowing capacity that amplifies throughout a housing boom. The relationship is heterogeneous, as changes in borrowing capacity have larger effects among low-income and first-time buyers and in expensive property markets. If no downpayment is required, tightening the LTV limit may not contain borrowing capacity but still curbs leverage among highly-indebted borrowers.

Is there a green discount in commercial real estate lending?

PurposeThis study examines whether green buildings enjoy more favorable financing terms compared to their non-green counterparts, exploring the presence of a green discount in commercial real estate lending. Despite the extensive research on green premiums on the equity side, lending has received limited attention in the existing literature, even as regulations have increased and ambitious net-zero targets have been set in the banking sector.Design/methodology/approachIn this study, the authors leverage a unique dataset comprising European commercial loan data spanning from 2018 to 2023, with a total loan value exceeding €30 billion. Hedonic regression analysis is used to isolate a potential green discount. Specifically, the authors rely on property assessments conducted by lenders to investigate whether green properties exhibit lower interest rate spreads and higher loan-to-value (LTV) ratios.FindingsThe findings reveal the existence of a green discount in European commercial real estate lending, with green buildings enjoying a 5.35% lower contracted loan spread and a 3.92% lower target spread compared to their non-green counterparts. However, this analysis does not indicate any distinct advantage in terms of LTV ratios for green buildings.Practical implicationsThis research contributes to a deeper understanding of the interaction between green properties and commercial real estate lending, offering valuable insights for both lenders and investors.Originality/valueThis study, to the best of the authors’ knowledge, represents the first of its kind in a European context and provides empirical evidence for the presence of a green discount.

Digging Deeper—Evidence on the Effects of Macroprudential Policies from a New Database

AbstractThis paper introduces a comprehensive database of macroprudential policies, which covers 134 countries from January 1990. Using a novel numerical indicator of the tightness of loan‐to‐value (LTV) regulations, we estimate the policy effects of incremental tightening in LTV limits, employing a propensity score–based method to address endogeneity concerns. The results point to economically significant and nonlinear effects on household credit, with a declining per‐unit impact for larger tightening measures. The analysis indicates that policy leakage effects could be a factor behind the nonlinear effects. We finally find that the side effects of macroprudential policies on consumption and output are relatively small.

Analysis of the Effectiveness of Banking Credit Risk Control with Macroprudential Policy in Indonesia

High credit risk will affect the health of the bank which will be a factor causing systemic risk. This research aims to analyze the effectiveness of macroprudential policy in controlling banking credit risk in Indonesia. This research uses Non-Performing Loans (NPL) as an indicator of credit risk. Meanwhile, as indicators of macroprudential policy, policy instruments such as LTV (Loan to Value), RIM (Macroprudential Intermediation Ratio), DTI (Debt to Income), and COC (Ceilings on Credit). The analytical method used in this research is panel data regression analysis with a fixed effect model (FEM). The research results show that simultaneously each macroprudential policy instrument, be it RIM, DTI, and COC, influences banking credit risk in Indonesia, and easing policy on LTV is unable to reduce NPLs.