The Unusual Mortgage Market of the United States

The International Comparison of Mortgage Product Offerings report released this September, composed by Dr. Michael Lee for the Research Institute for Housing America (RIHA), has revealed many oddities regarding the American mortgage market.

For starters, for a developed country, the U.S. has an atypically high proponent of mortgagors opting for longer term fixed rates. Securitization also plays a larger role in providing housing financing than in other countries, such as Australia where securitization plays virtually no role but interest rates are overall higher.

The U.S. has also decided to restrict, or depending on case actually ban, pre-payment penalties on fixed rate mortgage products. The recently passed (July, 2010) Dodd-Frank Financial Reform Bill has brought about several new restrictions on the U.S. mortgage market, including limits on term lengths, interest-only payment periods, and a reduction in the flexibility of payment procedures and mortgage terms. While some think the new bill is a step in the right direction, advocating and providing consumer protection, others pose that the bill over-regulates aspects of the mortgage industry that have not had effect on mortgage default rates in countries outside of the U.S.

While impeded economics have been the cause, or one of the causes, of heightened debt to income ratios globally, the U.S. experiences mortgage defaults more significantly than most other developed countries. The U.S. also saw one of the greatest dives in property values. Between 2008 and 2009 U.S. housing values saw a crash dip to -15 per cent, while Canada’s managed to stay above 0. Ireland was the next market to dive, seeing housing prices slide negative of even those in the U.S. into 2009.

Interestingly, while home ownership rates for Canada, the U.S., the U.K. and Australia are pretty much equal, balancing around the 70 per cent range, Spain projects the highest homeownership rate, at just over 80 per cent, and most of those homeowners opt for variable mortgage rates. Of the 11 developed countries compared for homeownership rates in the RIHA report, Germany and Switzerland took the lowest spots, at about 45 and 35 per cent respectively.

When contrasting outstanding mortgage debt to GDP, for 2008, the national rankings did some interesting switches. Information garnered from the World Bank and other central banks revealed that the highest mortgage debt ratios, of the 12 developed countries used in the RIHA comparison, belong to the Netherlands, the U.S. and Switzerland (at almost 100 per cent), which could explain why Switzerland also has the one of the lowest home ownership rates. Canada ranked in the median range, at just over 60 per cent, while Japan and Italy saw the lowest ratios, at about 30 per cent and 20 per cent respectively.

Japan has also sustained the lowest interest rates, alongside Switzerland; the lowest and highest mortgage debt ratio producing developed nations. Canada’s interest rates have been floating above those of the U.S., but underneath Australia’s, the nation showing the highest interest rates, plausibly due to the lack of competition among mortgage lenders in that nation. Australia’s top four banks finance 90 per cent of the issued mortgages in that country.

Yet in Australia, virtually all mortgagors (about 95 per cent) select variable rate mortgages, while in the U.S. the inverse is true: 95 per cent of U.S. mortgagors opt for long-term fixed rates.

Spain, Korea and Ireland also see an overwhelming majority of homebuyers selecting variable rates, while countries like Canada, Denmark and the Netherlands see a pretty much even blend of variable rates, medium-length fixed terms, and long-term fixed rate mortgage products.

The prevalence of mortgages default rates in the U.S. over other developed countries seems to indicate that only in the U.S. has subprime lending become a major issue, despite depreciations in the market value of property and oscillating interest rates that have been experienced globally. The RIHA report makes mention that the only other location within the developed nations marked with a peak in mortgage default was in the U.K. among non-conforming mortgages, meaning mortgages attained with low credit score and minimal documentation.

Now that the U.S. is imposing increased mortgage regulation and consumer protection, it will be interesting to see how these measures affect mortgage default rates and mortgage issue rates. Only Japan, Canada, and the U.S. provide government security guarantees, and only the Netherlands, Canada, and the U.S. offer a government mortgage insurer. Given these items, it does not look likely that the compared stability of the Canadian housing and mortgage market is due to the mortgage default insurance policy imposed on all high-ratio mortgages attained by Canadians, but factors more intrinsic. Only in Korea and the U.S. are government sponsored enterprises existent.

It appears that the push for homeownership and consumer credit in the U.S. weighs is in excess of formulating an actual, and conservative, independent financial strategy.

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