Loan to Value Caps and Government-Backed Mortgage Insurance: Loan-Level Evidence from Dutch Residential Mortgages
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Loan to Value Caps and Government‑Backed Mortgage Insurance: Loan‑Level Evidence from Dutch Residential Mortgages Leo de Haan1,2 · Mauro Mastrogiacomo1,3,4
© The Author(s) 2020
Abstract Using loan level data on mortgage loans originated by Dutch banks during 1996 to 2015, we analyse the determinants of the incidence of non-performance. We find that both the originating loan-to-value ratio (OLTV) and the debt-service-to-income ratio are significantly positively associated with the probability of non-performance. The results suggest that mortgages with government-loan-guarantees perform better. Moreover, several mortgage loan and borrower characteristics, such as the (interestonly) loan type and the underwater status of the borrower, increase credit risk. Our model predictions suggest a novel policy implication: in order to avoid acceleration of non-performance probabilities, the OLTV-limit should be set to about 70–80% for uninsured mortgages, and to about 90% for those with mortgage insurance. Keywords Credit risk · Mortgage loans · Loan to value · Loan guarantees · Mortgage insurance JEL Classification G20 · G21 · H81
We thank Dennis Olson, Conor O’Toole, and participants of the DNB seminar (May, 2019) and the World Finance Conference (July, 2019) for useful comments and advice. The views expressed are those of the authors and do not necessarily reflect the positions of DNB or CBA. * Mauro Mastrogiacomo [email protected] 1
De Nederlandsche Bank, Amsterdam, The Netherlands
2
Centrale Bank van Aruba, Aruba, The Netherlands
3
Vrij Universiteit Amsterdam, Amsterdam, The Netherlands
4
Netspar, Tilburg, The Netherlands
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L. de Haan, M. Mastrogiacomo
1 Introduction A growing amount of literature is currently focusing on the relationship between indebtedness and credit risk. Excessive indebtedness, combined with nonrecourse loans (Li and Oswald 2017), has been one of the main drivers of the recent financial crisis, as it induced defaults and a number of negative externalities, such as a drop in consumption (Mian and Sufi 2009) and asset prices (Mian et al. 2013) that spread from the US to most economically developed countries. Macroprudential policy, in the form of setting LTV and DSTI caps, is being used in order to prevent such externalities (Geanakoplos 2009). Wong et al. (2011) discuss the role of maximum LTV ratios on mortgage delinquency. Also Gerlach-Kristen and Lyons (2018) show that defaults tend to be more common in countries with high LTV ratios. Yet it is unclear how to calibrate these caps (Galati and Moessner 2018). Most studies focus on cross country comparisons and rely on differences across countries, to estimate the relationship between LTV and DSTI-caps and risk. These studies are either conducted using macro data (Stanga et al. 2017) or micro data (Japelli et al. 2008). The first type of data has the advantage of an easier international comparability, while it misses the possibility to estimate any causality by considering units being exposed to a common
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