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Two Extensive Margins of Credit and Loan‐to‐Value Policies
Author(s) -
GETE PEDRO,
REHER MICHAEL
Publication year - 2016
Publication title -
journal of money, credit and banking
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.763
H-Index - 108
eISSN - 1538-4616
pISSN - 0022-2879
DOI - 10.1111/jmcb.12337
Subject(s) - externality , loan , economics , value (mathematics) , balance (ability) , work (physics) , loan to value ratio , house price , monetary economics , microeconomics , actuarial science , mortgage insurance , finance , medicine , mechanical engineering , machine learning , casualty insurance , computer science , engineering , physical medicine and rehabilitation , insurance policy
We analyze a model of mortgage markets, housing tenure choice, heterogeneous agents, and default with closed form solutions. We uncover new insights which may inspire empirical work, and we ground already established insights in a series of tractable expressions. Then we study optimal loan‐to‐value (LTV) regulation and show that the choice of an LTV cap should balance the opposing forces of access to homeownership and the negative externalities associated with default. Homeownership affordability concerns induce procyclical elements into optimal regulation which attenuate the countercyclical regulation justified by the negative default externalities.