The Missing LTV Cycle

Manuel Adelino, W. Ben McCartney and Antoinette Schoar

Many models of credit cycles rely on changes in collateral constraints to generate boom-bust dynamics in house prices. Contrary to this assumption, we show that the equilibrium loan-to-value (LTV) distribution in the US over the last quarter century was remarkably stable both in the aggregate and region-by-region, despite large and cross-sectionally heterogeneous house price cycles. Although high-LTV mortgages shift between explicit government backing and private lenders over time, their overall fraction does not change. A repeat-sales methodology and an analysis of loan performance confirm that there is limited variation in the distribution of LTVs even within subgroups of the population.

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Current Credit and Financial Distress projects from the Consumer Finance Initiative cover topics including mortgage refinancing, lending standards and shadow debt and bankruptcy. Find more Credit and Financial Distress research here.