Raising Household Leverage: Evidence from Co-Financed Mortgages

This article studies the impact on mortgage origination conditions and performance of a product that aims at raising household leverage: bank mortgages co-financed with a housing provident fund (HPF), a compulsory saving scheme for all private sector workers in Mexico. Relative to traditional bank mortgages, our estimates show that down payment of the co-financed declines substantially, by 7.6 percentage points, whereas purchased properties are not more expensive. Despite their higher leverage, co-financed bank mortgages do not exhibit higher default rates---their lower liquidity needs to cover upfront costs and monthly payments reduce credit risk. We also find distributional effects: The scheme alleviates borrowing constraints more at lower incomes, especially when banks are smaller. Larger banks, with a greater share of low-income borrowers, use co-financing to reduce the amount lent to those segments. Thus, when the HPF's lending conditions become relatively less generous at lower incomes, we find that larger banks neutralize the substitution between traditional and co-financed mortgages that is found on smaller banks' portfolios.