A comment on mortgage procyclicality

Abstract

This paper comments on mortgage procyclicality. A framework for credit constraints along the lines of Kiyotaki and Moore (1997) illustrates the potential regime shift in the credit risk assessments of mortgagees. Depending on the relationship between house price growth and the alternative rate of return the weight given to collateral and debt-servicing ability may vary according to the house price cycle as mortgagees engage in search-for-yield. Regime shifts might come about when house price appreciation is expected and risk assessments ignore debt-servicing ability, fuelled by competition for mortgage market shares and expansionary monetary policy. In the case of regime shifts increased house price growth might stimulate owner-occupation and LTV-ratios and induce mortgage procyclicality