Will government red tape limit options for mortgage borrowers?
Restricting adjustable-rate mortgages and other more unconventional types of home loans may not be such a good idea, according to a study of mortgage loans in different countries. Fixed-rate mortgages may not always be a great deal, asserts the new study from the Mortgage Bankers Association.
Adjustable-rate mortgages are common in other developed countries, but default rates have been far lower in other countries, even though some had even greater home price declines, says the report, “International Comparison of Mortgage Product Offerings. That goes to show that mismatching mortgages and borrowers, not adjustable-rate mortgages themselves, prompted the mortgage crises. Outside the US, subprime lending was common only in the UK.
Yet the comprehensive overhaul of financial regulation, the Dodd-Frank bill, restricts adjustable-rate mortgage terms like interest-only periods and flexible payment designs.
“The U.S. has traditionally had one of the richest sets of mortgage products available, offering a variety of adjustable rate mortgages, amortization choices and terms, along with long-term fixed-rate mortgages,” said Dr. Michael Lea, director of the Corky McMillin Center for Real Estate at San Diego State University, who did the study.
After the housing crisis, everybody jumped on the fixed-rate mortgage bandwagon, drawn by historically low mortgage interest rates. With the new financial regulation, fixed-rate mortgages may remain dominant.
“It is important for those implementing the regulation,” Lea said, “to consider whether such a dramatic and permanent shift in the mortgage market will do more harm than good.”
“By focusing regulation on loan product design,” he said, “borrower choice will be deeply impacted as products that are commonplace in other countries will be considered unqualified for American borrowers.”
There are many types of borrowers and all have different needs. “We can’t expect one mortgage product to fit all of their needs,” Michael Fratantoni, MBA’s vice president of research and economics.
According to the study, which examined 12 developed countries with different mortgage markets, 95 percent of new loans made in the U.S. in 2009 were long-term fixed-rate mortgages. In other countries, the share of fixed-rate mortgages is much lower. Long-term fixed-rate mortgages account for 1 percent of all home mortgages in Spain, 2 percent in Korea, 10 percent in Canada, 19 percent in the Netherlands and 22 percent in Japan.
In 2009, 5 percent of new home loans in the U.S. were variable rate. That compares to 92 percent in Australia and Korea, 91% in Ireland, 47 percent in the UK and 38 percent in Japan.
Most countries in the sample usually 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 home loan, according to the study, sponsored by MBA’s Research Institute for Housing America (RIHA),
While some believe that the fixed-rate mortgage is the ideal home loan for all consumers, it does have significant drawbacks. Eliminating early payment penalties means all borrowers pay higher interest rates, which effectively socializes the prepayment option. In the European view only borrowers who prepay home loans should pay the cost.
ate data to the British Bankers Association between 2006 and 2008 in an attempt to manipulate LIBOR. Compiled daily by the BBA from information from 20 large banks, LIBOR is the benchmark index for “trillions of dollars worth of mortgages and others loans in the U.S. and other countries,” explains an article in The Wall Street Journal today.
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