A Study On Credit Rationing In Home Mortgage Market

Credit rationing emerges when there's more loan demand than loan supply thus the credit market can't clear.Downpayment requirement is popular in home mortgage market,which might means the existence of credit rationing.We can generalize a framework of credit rationing from those seminal works,including the micoeconomic basis for how credit rationing emerges,mechanisms to reduce credit rationing and macroeconomic implications of credit rationing.In general,the literatures on credit rationing in home mortgage market can be broadly classified into two paradigms with different assumptions about information.One assumes that a borrower's risk characteristics are private information and explains credit rationing with forced default ,the other assumes information externalities and explains credit rationing with rational default.However, the literatures are incomplete in three aspects as follows: First of all,researchs on the credit rationing from the point of view of asymmetric information and that of information externalities is independent,Secondly, screening and signaling are treated independently.Third, there's too few researchs on moral hazard and macroeconomic implications of the credit rationing.This paper aims to probe the micoeconomic basis for how credit rationing emerges, mechanisms to reduce credit rationing and the macroeconomic implications of credit rationing in home mortgage market including the three aspects which had been incomplete,to explain some phenomenons in home mortgage market and to give associated policy suggestions.Micoeconomic bases for how credit rationing emerges are adverse selection and information externalities.At first, an adverse selection model is formed which suggests that given some conditions there exists a partial credit rationing equilibrium .Then, information externalities hypothesis is introduced in the adverse selection model and a general credit rationing equilibrium model is formed.On the one hand additional information improves a creditor's ability to judge risk and thus make loan supply increase consequently (adverse selection model),on the other hand more loan supply makes more housing transactions and the quality of real estate appraisals improved consequently (information externalities hypothesis).General credit rationing equilibrium model suggests that more housing transactions make improvement of real estate appraisal,as a result, credit rationing is reduced and equilibrium rate is increased.The comparative static has some policy implications as follows:First,an increase of cost of fund results in no change of equilibrium interest rate but an increase of credit rationing.Second, an increase of total loan demand results in higher equilibrium interest rate and an increase of credit rationing.Third,an increase of the ratio of higher risk borrowers results in lower equilibrium interest rate and an increase of credit rationing.Quality of real estate appraisal is more important in mortgage market with old housing than that in mortgage market with new housing.Government regulation on lowering housing would make housing transaction decreased and quality of real estate appraisal worsen consequently.As a result,loan supply in home mortgage market with old housing would decrease more badly than that in home mortgage market with new housing.So this paper suggest the regulation to be more mordest with old housing than with new housing.Signaling-screening mechanism and incentive mechanism can play a role in reducing credit rationing in home mortgage market. Signaling-screening model suggests that in the respective screening-only equilibrium only the riskiest borrower in the entire population obtains the complete information optimal contract.In the signaling-screening equilibrium,however,because borrowers are clustered into subsets,it is the riskiest borrower in each subset that might obtain his complete information optimal contract and most borrowers will be closer to that contract.However,those borrowers also incur signaling costs.If these signaling costs are sufficiently small or sufficiently socially efficient,the signaling-screening equilibrium will be Pareto superior to a corresponding screening-only equilibrium. This is supported by the dilemma of Shanhai's system of individual credit collection.The moral hazard model suggests home equity mortgage instead of common home mortgage market faces incentive problem and loss of moral hazad,which helps explain the phenomenon that home equity mortgage hasn't been an important thing all over the world.By tying payments to a housing price index,we might make the moral hazard problem reduced or even disappear.Credit rationing in home mortgage market has effect on macroeconomy steady state and fluctuations.In a newclassical paradigm,we form models of borrower's utility maximization,firm's profit maximization and competitive equilibrium,which suggest that reduced credit rationing could increase steady-state output increase and iron economy fluctuation.This paper suggests People's Bank of China not increase downpayment of home mortgage at any stage of business cycle.