How Do Regulators Influence Mortgage Risk: Evidence from an Emerging Market

To understand the effects of regulation on mortgage risk, it is instructive to track the history of regulatory changes in a country rather than to rely entirely on cross- country evidence that can be contaminated by unobserved heterogeneity. However, in developed countries with fairly stable systems of financial regulation, it is difficult to track these effects. We employ loan-level data on over a million loans disbursed in India over the 1995 to 2010 period to understand how fast-changing regulation impacted mortgage lending and risk. We use cross-sectional differences in the time- series variation of delinquency rates, conditional on initial interest rates, to detect the effects of regulation on mortgage delinquencies.