The introduction of limits or regulatory penalties on high LTV ratios for residential mortgages is one of the most frequently used tools of macroprudential policy. The available evidence seems to indicate that this instrument can reduce the feedback loop between credit and house prices. In this paper, we show that
these constraints on LTV ratios, used by Spanish banking regulators before the onset of the housing crisis
of 2008, did not prevent that feedback loop. In the Spanish case, the fact that ...
The introduction of limits or regulatory penalties on high LTV ratios for residential mortgages is one of the most frequently used tools of macroprudential policy. The available evidence seems to indicate that this instrument can reduce the feedback loop between credit and house prices. In this paper, we show that
these constraints on LTV ratios, used by Spanish banking regulators before the onset of the housing crisis
of 2008, did not prevent that feedback loop. In the Spanish case, the fact that appraisal companies were
mostly owned by banks led to a situation in which the LTV limits were used to generate appraisal values
adjusted to the needs of the clients, rather than trying to appropriately represent the value of the property.
This tendency towards over-appraisals produced important externalities in terms of a higher than
otherwise demand for housing, and intensification of the feedback loop between credit and house prices.
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