Constraints on LTV as a Macroprudential Tool: A Precautionary Tale

Josep M. Raya and José García-Montalvo

No 1008, Working Papers from Barcelona School of Economics

Abstract: The introduction of limits or regulatory penalties on high LTV ratios for residential mortgages is one of the most frequently used tools of macroprudential policy. The available evidence seems to indicate that this instrument can reduce the feedback loop between credit and house prices. In this paper, we show that these constraints on LTV ratios, used by Spanish banking regulators before the onset of the housing crisis of 2008, did not prevent that feedback loop. In the Spanish case, the fact that appraisal companies were mostly owned by banks led to a situation in which the LTV limits were used to generate appraisal values adjusted to the needs of the clients, rather than trying to appropriately represent the value of the property. This tendency towards over-appraisals produced important externalities in terms of a higher than otherwise demand for housing, and intensification of the feedback loop between credit and house prices.

Keywords: Regulation; loan to value; macroprudential policy (search for similar items in EconPapers)
JEL-codes: E52 E58 G28 (search for similar items in EconPapers)
Date: 2017-12
New Economics Papers: this item is included in nep-cba, nep-mac and nep-ure
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Persistent link: https://EconPapers.repec.org/RePEc:bge:wpaper:1008

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