Mortgage Loans and Bank Risk Taking: Finding the Risk “Sweet Spot”

Abstract

A vast body of academic literature deals with banks’ optimal loan allocations. The general approach to solving this problem is to assume borrowers’ portfolios as given. Although this assumption is reasonable in the corporate sector, the situation differs radically in the mortgage markets, where borrowers are unobservable and banks’ screening capacity is tightly limited. We propose a novel dynamic model that assumes potential mortgage takers arrive randomly and sequentially at a bank. In a simulation, we show that the effect of a more stringent level of perceived risk on a bank’s expected net income can be positive or negative. Remarkably, if both level of wealth inequality and screening capacity are low, a more severe level of perceived risk can decrease a bank’s expected net income. In this situation, regulators should be particularly careful about increasing regulation in the form of a lower loan-to-value ratio.

Conventional Home Loan and Islamic Home Financing in Comparative Perspective

“…Interest factor = ( 1 : K ) -( 1 weaknesses, yet the latter (effective interest rate calculation method) is the most frequently used one. It is because the first factor, the debtors only need to pay for the interest amount in accordance with the rest of the loan amount that they still owe (Mugerman, Tzur, & Jacobi, 2018).…”

“…In the case wherethe customers want topay off the remaining KPR installments before maturity, BCA distinguishes the customers into two conditions: the customers following one of the three available programs, KPRBCA, KPRBCA Refinancing, or KPRBCAXtra, plus their Fix and Cap program or the customers choosing KPR, but the payment method used is floatinginterest rate from the beginning of the payment period. To the customers following one of the three available programs, KPRBCA, KPRBCA Refinancing, or KPRBCAXtra, plus their Fix and Cap program, or those are classified into condition one, BCA applies a penalty fee that is taken from the principalloan of the remaining monthly installments and is recognized as income (Mugerman et al, 2018).…”