Abstract
This chapter investigates whether mortgage regulation assures proper decision-making by borrowers. It offers regulatory responses to mitigate a “mortgage illusion” phenomenon revealed in recent experimental studies. According to these experiments, buyers are influenced by the comparison between the monthly rental payment and the monthly mortgage installment for fixed-rate mortgages. Therefore, consumers are more likely to buy a house when the rent is higher than the mortgage installment. The chapter suggests that regulators account for this phenomenon when designing mortgage policies.
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Notes
- 1.
The anchoring bias describes the common human tendency to rely too heavily on the first piece of information offered (the “anchor”) when making decisions (sometimes referred to as the “anchoring effect”).
- 2.
Discounted cash flow (DCF) is a method to estimate the value of an investment based on its future cash flows. DCF analysis determines the present value of an expected future cash flow using a discount rate. A present value estimate is then used to evaluate a potential investment. If the value calculated through DCF is higher than the current cost of the investment, the opportunity should be considered.
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Camanho, N., Levine-Schnur, R., Farber, T. (2020). Dealing with an Anchoring Bias in the Mortgage Market: A Regulatory Approach. In: Levine-Schnur, R. (eds) Measuring the Effectiveness of Real Estate Regulation. Springer, Cham. https://doi.org/10.1007/978-3-030-35622-4_10
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