The credit-risk implications of home ownership promotion: The effects of public subsidies and adjustable-rate loans

Michel Dietsch and Joël Petey

Journal of Housing Economics, 2015, vol. 28, issue C, 103-120

Abstract: This study analyzes the credit risk of housing loans with a particular focus on mechanisms that may help disentangling the financial constraints of low-income borrowers: public support and access to adjustable-rate loans. Using a large database of French housing loans covering the years 2000–2010, we show the following: supplying loans with financial assistance helps financially constrained borrowers to absorb income shocks, adjustable-rate loans are riskier on average, and the combination of public support and adjustable rates can lead to a concentration of risk in the lender’s portfolio. The risk measurement methodology used in this paper extends the one-factor economic capital model underlying the Basel 2 regulatory credit-risk formulas. This portfolio approach leads to the credit risk of housing loans being handled as a portfolio management issue for the lender. From this perspective, our results also illustrate that the ability to promote access to homeownership to low-income borrowers may be determined by the lender’s capacity to identify diversification benefits at the portfolio level. Thus, risky borrowers may have a limited credit-risk level from the lender’s perspective, which facilitates the supply of housing finance.

Keywords: Housing finance; Downside subsidies; Interest rate subsidies; Credit risk; Economic capital (search for similar items in EconPapers)
JEL-codes: G21 G32 R31 R38 (search for similar items in EconPapers)
Date: 2015
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jhouse:v:28:y:2015:i:c:p:103-120

DOI: 10.1016/j.jhe.2015.03.001

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