Many in the industry continue to oppose the increasing amount of government direction, regulation, and interference in the housing market in the United States. To one degree or another, however, the U.S. government in this country has always had an interest in housing, with varying effects. The U.S. has a relatively high rate of homeownership but it is not the highest among major developed markets. In this comparison, Australia, Ireland, Span and the U.K. all have higher rates of homeownership and Canada’s rate is comparable to that of the U.S. And interestingly, these countries provide far less government support for homeownership than the U.S. Can we learn anything from looking at home ownership, and mortgage lending, in other countries?
Most western European countries have lower rates of homeownership in part due to strong social rental systems but southern European countries like Italy, Greece and Spain have higher rates of homeownership reflecting cultural values, discriminatory policies towards private rental housing and weaker support of social rental housing. During the early 2000’s the US had an unprecedented run-up of house prices, but values in other countries actually increased more. And then Australia and the U.S. were the first of the bubble countries in which house prices fell, the U.S. more than other countries, although the Australian housing market has since recovered.
Turning to mortgage rates, rates in most countries declined during the decade - except in Australia. (The Australian central bank increased interest rates in 2003 in part to head off a housing price bubble.) Australia is among a group of countries, which also includes Ireland, Spain, and the UK, where mortgages are predominately short-term variable rate markets. Their mortgage rates declined more sharply than those in other countries during the crisis.
More specifically, lenders mostly offer variable rate or short term (typically 1-3 year) fixed rate mortgages in Australia, Ireland, Spain and the UK. The designs of adjustable rate mortgages vary - in Australia and the UK the standard variable rate mortgage has a rate set by the lender at its discretion, and rates are changed for all borrowers at the same time. Spain and the US have indexed ARMs. In the UK, “tracker mortgages,” which are indexed ARMs, have become dominant, and initial fixed rate discounts are prevalent in Australia and the UK. But the magnitudes of the discounts are less than those in the US during the boom – typically around 100 basis points lasting 1-2 years
Here in the States, as we know, we have a high proportion of long term fixed rate mortgages. The ARM and short term fixed (hybrid) share in the US grew during the boom – accounting for about 1/3 of loans during the 2004-2006 period but our market has reverted to the fixed rate mortgage in recent years.
Heading back to Europe, long term fixed rate mortgages used to be the dominant product in Denmark but relatively low and falling short-term rates have led Danish borrowers to shift to medium term (1-5 year) fixed rate loans in recent years. (A high proportion of Dutch loans are interest only to maximize tax benefits.) Rollover mortgages are the dominant product in Germany and the Netherlands, as well as Canada. These loans have a fixed rate for up to 5 years (10 years in Germany) with a 25-30 year amortization period (briefly up to 40 years in Canada). At the end of the fixed rate period the rate adjusts to the new market rate. There is a substantial (as high as yield maintenance) prepayment penalty during the fixed rate period. Some Spanish loans are part fixed and part variable rate.
In the Orient, about one half of Japanese loans are convertible (after the end of the fixed rate term the borrower can select another fixed rate period or switch to a variable rate).6 Japanese floating rate loans have fixed payments for 5 years with potential deferral and negative amortization. Mortgage funding comparisons reveal interesting differences.
In contrast to securitization which is primarily a U.S. feature, deposit funding dominates in most countries. (Over 60% of US residential mortgages have been securitized – the next closest countries are Canada, Spain and the UK with 24% to 28% securitized.) Covered bonds are a more common funding mechanism in Europe – for example 94% of Danish funding and 47% of Spanish funding come from this source.
(A big thank-you is owed to Loren Picard, Senior Managing Director of LMA Capital, Inc., a firm focused on advising mortgage banking firms and mortgage investors in the creation and management of unique mortgage products in the non-agency market.)