Variety of Alternative Mortgage Loan Products Around the World
According to a study released today by the Mortgage Bankers Association (MBA), mortgage features like longer terms, interest-only periods and flexible payment designs are quite common in other countries and are not associated with higher rates of default. The study entitled, “International Comparison of Mortgage Product Offerings”, which was conducted by Dr. Michael Lea, Director of the Corky McMillin Center for Real Estate at San Diego State University and sponsored by MBA’s Research Institute for Housing America (RIHA), examines the predominant mortgage designs and characteristics that exist in different international markets and how they have performed prior to and during the crisis.
The study examined 12 developed countries with distinctly different mortgage market and product configurations. The study results showed that 95% of new loans made in the U.S. in 2009 were long-term fixed-rate products compared to various other countries with a lower share including 1% in Spain, 2% in Korea, 10% in Canada, 19% in the Netherlands and 22% in Japan. In addition, 5% of new loans made in the U.S. in 2009 were variable rate, which compares to the higher shares found in other countries including, 92% in Australia and Korea, 91% in Ireland, 47% in the UK and 38% in Japan. Key findings:
– of the countries sampled, all typically subject fixed rate mortgages to an early repayment penalty except Denmark, Japan and the U.S. In Australia, Canada, Denmark, Germany, the Netherlands and Switzerland the penalties are designed to compensate the lender for lost interest over the remaining term of the fixed rate.
– while some believe that the fixed-rate mortgage (FRM) is the ideal consumer mortgage instrument for all borrowers, its use does have significant drawbacks. In effect, the cost of the pre-payment option is socialized, with everyone paying a premium in the mortgage rate for the option. This contrasts with the European view that only borrowers who exercise the option for financial advantage should pay the cost.
– the U.S. has an unusually high proportion of long-term FRMs as well as use of securitization in the finance of housing. The dominance of the FRM and securitization is driven in part by the presence of government-backed secondary mortgage market institutions that lower the relative price of this type of mortgage.
– the U.S. is unusual in the banning or restriction of prepayment penalties on FRMs. Most countries in the survey allow such penalties to compensate lenders for loss associated with the financing of mortgages. As a result, mortgage rates in those countries do not include a significant pre-payment option premium and other financing techniques, such as covered bonds, are more common.
– according to an EMF study on the efficiency of mortgage collateral, borrowers remain liable for deficiencies in Belgium, Germany, Greece, the Netherlands, Spain, France, Ireland, Portugal and the U.K.
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- Report: Interest-Only Loans Unfairly Blamed for Mortgage Crisis (blogs.wsj.com)
- Mortgage rates can’t do all the heavy lifting (hsh.com)
- Great credit may not get you a great mortgage (msnbc.msn.com)
- Amy Hoak’s Home Economics: If mortgage rates plunged to 0% (marketwatch.com)