Originating Loan to Value ratios and the resilience of mortgage portfolios

Fergal McCann () and Ellen Ryan
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Ellen Ryan: Central Bank of Ireland

No 10/EL/16, Economic Letters from Central Bank of Ireland

Abstract: It is widely acknowledged that mortgage lending with lower Loan to Value (LTV) ratios is expected to have a lower probability of default, which will increase the resilience of a bank's mortgage portfolio to adverse events. This Letter focuses on another channel through which lower-LTV lending can lead to improvements in bank balance sheet resilience: the lowering of losses in the event of a default (Loss Given Liquidation, LGL). Using data from three major mortgage lenders in Ireland on loans for property purchase, we focus on originating LTVs on mortgages issued between 2003 and 2016 to make a number of observations on the evolution of mortgage portfolio resilience. Firstly, aggregate hypothetical losses experienced in the event of a common shock are at the lowest level since 2003 among the cohorts of loans issued since the introduction of recent Central Bank of Ireland mortgage market regulations. Secondly, the correlation between originating LTV and loan size has been falling steadily since 2006, reflecting a decreased tendency for banks to make their largest loans also their most highly leveraged, which leads directly to improvements in portfolio-level resilience. Finally, we show that improvements in the resilience of mortgages to adverse house price shocks are most pronounced at the right tail of the LTV distribution, where the highest-risk lending has reduced significantly over the 2008-2016 period.

Date: 2016-11
New Economics Papers: this item is included in nep-ban, nep-rmg and nep-ure
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