LTV and DTI Limits—Going Granular; From Systemic Banking Crises to Fiscal Costs: Risk Factors

More cross-country analysis by the IMF on the properties of LTV and DTI limits – here.

Also, new IMF work on the fiscal costs of systemic banking crises – here.

One reply on “LTV and DTI Limits—Going Granular; From Systemic Banking Crises to Fiscal Costs: Risk Factors”

“More cross-country analysis by the IMF on the properties of LTV and DTI limits”

The interest in LTV and DTI – as expressed in the above, are misplaced. The countries and their respective financial institutions are of secondary concern – with respect to individual borrowers (private residential mortgage holders). The fate of the individual borrower is of primary concern. That is, what is the situation with regard to the incomes of these borrowers- not their granular aggregate incomes, but their individual incomes. If an individual borrower becomes income constrained – then that individual is in real bother – not the financial institution from which they contracted their mortgage loan. Unless of course we had a 350% inflation in property prices. Oh, we did? Well, well.

Basically, this ‘bleeding heart’ macroprudential behaviour toward the private residential mortgage providers is a form of political and economic Psychic Balm in an attempt (successfully) to displace interest away from the real festering problem: income stagnation or deflation. The lowering and lowering of the basic interest rates is merely an artful piece of financial chicanery to mask the forementioned income problem. So also are the so-called ‘teaser’ loans (interest only or initial low interest rate) and extending the loan repayment period beyond 360 months.

The place to start your so-called macroprudential process is to thoroughly de-brief individual mortgage applicants about their incomes and all their outgoings. The custom of allowing the combined incomes of two persons to be acceptable for a mrtgage loan is a ‘slam dunk’ guarantee of significant increase in the proportions of private residential mortgages which will go into arrears and likely default. But whose paying attention here?

There was a time, several decades ago, when residential mortgage arrears and defaults were consistently below 2%. They are now above 20% or so. Any need to explain why? I suspect that the de-regulation of financial institutions and the opening of the private residential mortgage ‘market’ to greater competition (equivalent to lowering or even abolishing lending standards) had some causal effect. But whose paying attention here?

The larger one’s private residential mortgage repayments, the less one has to spend. Axiomatically, that reduces personalconsumption. Now if the latter represents about 60% of overall economic activity, then larger and larger mortgages should lead to a fall in overall economic activity? Depends I suppose how you measure overall economic activity. Seems mighty odd the way its done.

Our current financial institutions are basically operating in a low-risk or even a no-risk lending environment. Not so the individual borrower. So macroprudential processes are redundant since the day the financials were deemed to be non-failing – courtesy the taxpayer. What is required is a micro-prudential process for each individual borrower. Would this micro-prudential approach act in an indirect manner to moderate the prices of private residential properties? Sure it would. But this is what will be necessary to re-normalize the private residental housing market – absent a 30% increase in disposable incomes. So which should we expect. Lower prices? Rising incomes? Better check the Paddy Power website for the latest odds!

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