REAL ESTATE LENDING: Choice, Risk Management, and Financial Stability

Abstract

When lending to households against real estate, lenders consider collateral value, leverage, and borrower characteristics. Households choose loan size, interest rate risk, and amortization schedules. Evidence suggests that liquidity constraints drive decisions to default; optimal mortgage design depends on the correlation of income risk with interest rates, house prices, and inflation. Despite prohibitions, certain types of discrimination persist across jurisdictions. Mortgages are often securitized rather than being held directly. Real estate credit booms have been associated with financial crises. As a result, microprudential regulations target risks associated with real estate loans, although these are inconsistently applied across banks and non-banks. Macroprudential policy frameworks address the financial stability risks associated with mortgages over the financial cycle.