LTV Limits and Borrower Risk

17/12/2018 |  Tzur-Ilan Nitzan
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Finacial Markets and Financial Stability

Abstract

 

This paper explores the effects of the hard loan-to-value (LTV) limit implemented in Israel in 2012, which had three different cutoffs according to the borrower type: first-time home buyer, upgrader, or investor. The paper tries to overcome identification challenges where the treatment status is not observed. I find that this macroprudential policy measure succeeded in achieving its main goal, which was to reduce borrowers' leverage. I also find that constrained borrowers bought assets farther from the center of Israel, in neighborhoods with lower socioeconomic rankings; and a much stronger response than the impact of the 2010 soft LTV limit. Investors were found to be the borrower type most affected by the LTV limit. In terms of the credit market, the effect of the LTV limit on mortgage terms is counterintuitive: the limit increased the interest rate and the term to maturity. Plausible explanations for those results are discussed.​


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