Models in the infinite horizon macro-housing literature often assume that borrowers are constrained exclusively by the loan-to-value (LTV) ratio. Motivated by the Swedish micro-data, I explore an alternative arrangement where borrowers are constrained by the feasibility of repayment, but choose a house of maximum permissible size conditional on the LTV restriction. While stricter LTV limits are often considered as a measure to tackle the rise in household indebtedness, I find that policy designed to lower the maximum permissible LTV ratio may actually leave the debt-to-GDP ratio unchanged and increase housing prices in equilibrium if borrowers are bound by two constraints at the same time. In a model with occasionally binding constraints, I show that also for the analysis of the short-run effects of different policies, the consideration of multiple constraints, possibly binding at the same time, is important. The effectiveness of LTV as a measure to tackle the rise in indebtedness has to be reassessed and is likely lower than previously shown.
A growing literature (e.g., Jaffee et al. 2009, Acharya andSchnabl 2009) argues that securitization improves financial stability if the securitized assets are held by capital market participants, rather than financial intermediaries. I construct a quantitative macroeconomic model with a novel specification for mortgage-backed securities (MBS) to evaluate this claim. My findings suggest that the existence of the securitization market stabilizes the economy under the condition that financial intermediaries do not engage in the acquisition of securitized assets. In the presence of large negative housing preference shocks, the drop in output in the first year after the shock is halved if subprime MBS are purchased by non-financial agents rather than held by banks.
We investigate the effects of the abolition of double liability requirement in years 1934-50 in Canada on bank risk-taking and lending behavior. Under the double liability rule, the shareholders of a bank are liable up to twice the amount of their subscribed shares in the case of bankruptcy. Using historical balance sheet and accounting data, we show that the abolition of double liability, linked to the redemption of notes in circulation, was not accompanied by increased bank risk taking in Canada. Our findings are consistent with the literature that focuses on uniform regulations and nationwide branching as key financial stability elements in Canada.
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