Summary and conclusions

The chapter began with a classification of credit rationing into disequilibrium, equilibrium and dynamic rationing. Though the distinctions were somewhat arbitrary, and often have asymmetric information has a common causal factor, they do provide a useful way of viewing credit rationing in mortgage markets. The categories will also guide our review of empirical material. Disequilibrium rationing focuses upon the possible impact of financial deregulation and household behaviour, pre- and post-economy-wide rationing. Dynamic rationing focuses upon the process of mortgage market adjustment, the impact of securitisation and the integration of mortgage markets with other capital markets. Equilibrium rationing highlights the continuing possibility of credit rationing in a post-financial deregulation environment.

The non-price characteristics of any mortgage contract can be used to bring about equilibrium in the loan market. This was seen as problematic for the loan-to-value ratio, and mortgage maturity, but can be usefully applied to caps, collars and other contractual features. However, a range of non-price features, including the loan-to-value ratio, can be set to ensure a separating equilibrium. Information asymmetry changes the role of these non-price characteristics. Credit rationing, and separating equilibrium, can arise when expected default costs vary by individuals, and when such costs enter their utility functions. However, it is also possible that a separating equilibrium can arise without credit rationing and involve more borrowing by less risky households signalling their credit worthiness.

Securitisation and the growth in sub-prime lending had potentially important implications for the existence and extent of credit rationing. In theory, securitisation facilitates mortgage market adjustment and increases the supply of credit. Sub-prime lending did not mean that credit rationing was removed, as information problems might still persist. The persistence of information problems and mortgage credit rationing has important implications for the estimation of mortgage demand equations. For example, the truncation of the distribution of observed mortgage choices, and the simultaneous estimation of mortgage demand and default. The chapter which follows, examines the empirical methodologies and main findings relating to the existence, extent and influence of credit rationing in the US, UK and other economies.

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