Public-Private Mortgage Co-financing

In some emerging economies, housing provident funds (HPFs) are the main institutions that grant mortgages. Co-financing enables cooperation between HPFs and banks, but how it affects credit conditions and performance relative to mortgages entirely funded by banks is unclear. Using Mexican supervisory data, we find that co-financing leads to: i) larger (total) loan volumes, lower down payments, and a tiny decline in bank interest rates, ii) no increase in ex-post credit risk, and iii) a substantial reduction in banks' loan loss reserves. These findings imply that co-financing schemes alleviate borrowers' liquidity constraints, but also provide a subsidy for private lenders. Finally, by exploiting a change in the HPF's lending conditions, we find substitution between co-financed and traditional bank mortgages among smaller banks. Larger banks can better shield their portfolios from changes in the HPF's lending policies