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Monetary policy and the mortgage market : new evidence from loan-level data

Subject

Economics

Publishing details

2016 Under revision

Authors / Editors

Ferreira C

Publication Year

2016

Abstract

Using data on more than 5,000,000 individual mortgages issued in the UK from 1981q1 until 2007q4, I first provide novel evidence on the evolution and behavior of the mortgage market as characterized by the leverage and afford- ability positions of households when mortgages are originated. I then exploit within-mortgagors variation to analyze the role of mortgagors balance sheets in the transmission of monetary policy. Estimates point in the direction of significant mortgagor heterogeneity in two dimensions: (i) in the response of observed leverage (loan-to-value) and affordability (loan-to-income) ratios at the time of origination for the median mortgagor, and (ii) the response of LTVs for households that are first-time-buyers and those that are non-first-time-buyers. I then use a standard general equilibrium model with collateral constraints and endogenous housing tenure decisions to argue that the estimated empirical responses of LTVs and LTIs are likely to be robust to the theoretical asymmetry arising from positive and negative shocks when a mortgagor is at or around the leverage constraint. The main reason for this is the small size of the shock estimated from the data relative to average observed interest rates and leverage.

Keywords

Mortgage market; First-time-buyer; Monetary policy

Available on ECCH

No


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