Anchoring and adjustment in the mortgage market: A regulatory experiment

This research examines the seminal heuristic of anchoring and adjustment and its effects on the mortgage market. In recent years, the Israeli central bank has imposed protective regulation on mortgage loans in order to protect the banking system from systemic risk associated with highly leveraged homeowners. Using a unique and detailed dataset on mortgage loans from 2011 to 2016, we empirically estimate the impact of these restrictions on household choices and the housing market. In particular, we examine borrowers’ response to the three following regulatory restrictions: a payment-to-income (PTI) limit of 50%, a 2/3 limit on the adjustable rate component, and a 30-year maturity limit. We found that overall, the regulatory provisions tested served as an anchor to the borrowers. The most unexpected result we obtained was an increase in mortgage loans maturity following the imposed maturity limit.We concluded that the anchoring and adjustment heuristic may have influenced households’ decision in such a way that they perceived the maximum maturity limit as a relevant average maturity anchor and consequentially increased mortgage maturity.