Posted on Monday, October 4, 2010
(MBA) has released a report regarding the results of research examining international mortgage products and comparing them with the mortgage products in the United States.
The study found that features and products that are restricted in the Dodd-Frank Bill are widespread in other countries and are not necessarily believed to cause high rates of default. Features restricted by the bill include restrictions on longer terms, interest-only periods, and flexible payment designs.
Entitled “International Comparison of Mortgage Product Offerings,” the study was conducted by Dr. Michael Lea, who directs the Corky McMillin Center for Real Estate at San Diego State University, and it was funded by MBA’s Research Institute for Housing America. The study examined the predominant mortgage designs and characteristics that exist in 12 different international markets and noted how the designs have performed both prior to and during the crisis.
Findings of the study show that of the countries sampled, all typically subject fixed-rate mortgages to an early repayment penalty except Denmark, Japan and the U.S. In the other surveyed countries, the penalties are designed to compensate the lender for lost interest over the remaining term of the fixed rate. The study determined that an unusually high rate of fixed-rate mortgages in the U.S. can be attributed to the presence of government-
backed secondary mortgage market institutions that lower the relative price of this type of mortgage.
Of his findings, Lea said, “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.”
He continued, “As a result of the mortgage crisis, the market shifted to primarily fixed-rate mortgages, mainly driven by the historically low mortgage rate. As this shift is likely to remain under the guidelines of the Dodd-Frank Bill, it is important for those implementing the regulation to consider whether such a dramatic and permanent shift in the mortgage market will do more harm than good.”
The study showed that 95 percent of new loans made in the U.S. last year were long-term fixed-rate loans, compared to 1 percent of the same product originated in Spain, 2 percent in Korea, 19 percent in the Netherlands and 22 percent in Japan. Just 5 percent of new loans made in the U.S. last year were variable rate, compared to 92 percent variable rate loans last year in Australia and Korea, 91 percent in Ireland, and 47 percent in the UK.
Dr. Lea stressed his reservations on regulation that focuses on loan product design, saying such regulation will deeply impact borrower choice.
Michael Fratantoni, MBA’s VP of research and economics agrees. “We can’t expect one mortgage product to fit all [borrowers’] needs,” he said.
“Given the regulatory changes being implemented, MBA felt it was important to take a look at the range of product offerings available in other countries and identify potential features that could be used to safely expand market offerings in the U.S. As regulators begin implementing new guidelines for the mortgage market, we believe this information will help guide the changes to prevent future problems, while not restricting borrowers’ choices.”
The Washington, D.C.-headquartered Mortgage Bankers Association is a national association representing the real estate finance industry.