Loan-to-value policy and housing finance: Effects on constrained borrowers

This paper explores the effects on constrained borrowers of an LTV limit implemented on September 2013 on two segments of housing loans that constitute the bulk of housing loan originations in Brazil. LTV limits and related policies entail identification challenges, since constrained individuals are no longer directly observed after the regulation. We use comprehensive credit register information of individual housing loans augmented with a detailed, granular employment register. We focus on the average treatment effect on the treated borrowers, defined as the ones that would violate the LTV limit if allowed to do so. Partially observed treatment status is overcome by the use of an adjusted difference-in-difference method. In the housing loan segment that was subject to a sudden increase in demand due to broader eligibility rules, constrained individuals borrow housing loans with higher interest rates, shortened maturities, and, as expected, reduced loan amounts and LTV. These borrowers also purchase more affordable homes and are less likely to be in arrears 12 months in the future. In the other housing loan segment, subject to more stringent eligibility criteria, constrained borrowers also meet the LTV threshold, but the resulting contract terms stay roughly the same.