Mortgage features that are restricted in the Dodd-Frank Bill, such as longer terms, interest-only periods and flexible payment designs, which are quite common in other countries, are not associated with higher rates of default, according to a study recently released by the Mortgage Bankers Association.
The International Comparison of Mortgage Product Offerings study examines the predominant mortgage designs and characteristics that exist in different international markets and how they have performed prior to and during the crisis, according to a statement. The study examined 12 developed countries with distinctly different mortgage market and product configurations.
"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 Michael Lea, director of the Corky McMillin Center for Real Estate at San Diego State University. "As a result of the mortgage crisis, the market shifted to primarily fixed-rate mortgages, mainly driven by the historically low mortgage rates. 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 results showed that 95 percent of new loans made in this country in 2009 were long-term fixed-rate products compared to various other countries with a lower share including 1 percent in Spain, 2 percent in Korea, 10 percent in Canada, 19 percent in the Netherlands and 22 percent in Japan, according to a statement. In addition, 5 percent of new loans made in this country in 2009 were variable rate, which compares to the higher shares found in other countries including 92 percent in Australia and Korea, 91 percent in Ireland, 47 percent in the U.K. and 38 percent in Japan.
"The U.S. housing market is not operating in a vacuum and therefore should not be assessed in one," said Lea. "By comparing the performance of mortgage products internationally, we see that many countries are experiencing lower default rates than the U.S., despite having a significant share of products such as adjustable rate mortgages and interest only loans. This indicates the problem with loan design in the U.S. during the crisis was one of a mismatch between borrowers and particular loan designs – not the existence of the loan features themselves. In addition, the lower default rates may reflect stricter enforcement of lender rights as all countries in the survey have recourse lending. By focusing regulation on loan product design, borrower choice will be deeply impacted as products that are commonplace in other countries will be considered ‘unqualified’ for American borrowers."
