Mortgage supply, LTV and risk pricing

Trond-Arne Borgersen

International Journal of Housing Policy, 2018, vol. 18, issue 4, 522-544

Abstract: This paper focuses on mortgage supply and its contribution to the loan-to-value (LTV)-ratio. The paper starts by finding the optimal LTV-ratio for a profit-maximising mortgagee that supply mortgages using housing as collateral. As the LTV-ratio represents the mortgagee's risk exposure, the optimal LTV-ratio is one where the mortgagee is paid for its actual risk exposure. Thinking in terms of social welfare, the profit-maximising LTV-ratio is also optimal for society in our supply side framework. When including additional characteristics from the supply side of the mortgage market, the paper shows how the profit-maximising LTV-ratio varies according to moral hazard, risk pricing, funding structures, lending volumes and collateral values. The supply side characteristics create a wedge between the profit-maximising LTV-ratio and the LTV-ratio optimal for society. The model helps understand the role of mortgage supply in the period preceding the financial crisis, where LTV-ratios increased considerably. Consequently, it also allows for straightforward arguments regarding macro-prudential policy. Highlighting risk exposure, the paper continues by analysing the risk pricing response to falling house prices and an LTV-ratio that exceeds the LTV-ratio at origination. The paper finds a kinked-relation between the mortgage rate and the LTV-ratio ex post, separating risk pricing ex ante and ex post.

Date: 2018
References: Add references at CitEc
Citations:

Downloads: (external link)
http://hdl.handle.net/10.1080/19491247.2017.1336875 (text/html)
Access to full text is restricted to subscribers.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:taf:intjhp:v:18:y:2018:i:4:p:522-544

Ordering information: This journal article can be ordered from
http://www.tandfonline.com/pricing/journal/REUJ20

DOI: 10.1080/19491247.2017.1336875

Access Statistics for this article

International Journal of Housing Policy is currently edited by Professor Suzanne Fitzpatrick, Gerard van Bortel and Richard Ronald

More articles in International Journal of Housing Policy from Taylor & Francis Journals
Bibliographic data for series maintained by Chris Longhurst ().