Mortgagernfunding world-wide is based on three primary sources; bank deposits, mortgagernbacked securities (MBS) and mortgage bonds, with institutional investorsrnplaying a minor role in Canada, the Netherlands, and Germany.  The U.S. relies heavily on MBS for fundingrn(approximately 60 percent) while Denmark’s funding is almost entirely fromrnbonds.  The other countries have a mixrnwith deposits making up at least 50 percent in all nations except the U.S.,rnDenmark, and Spain.</p

Thernstudy found that the U.S. is unique in its reliance on long term fixed-raternmortgages (FRMs), a product which barely exists in many of the other countries.rnIn 2009, 95 percent of mortgages written in the U.S were long-term fixed-rate; Francernis the only other country where these constitute a majority.  In Australia, the UK, Ireland and Switzerlandrnthe market is totally dominated by various combinations of short and mediumrnterm fixed and variable rate products.  </p

Therndominance of deposit based funding and thus bank lending partially explains therndominance of ARMs in many countries.  Thesernare a natural product for banks that hold loans on balance sheet funding withrndeposits as they minimize interest rate risks. rnOf the ARM countries in the survey only Spain relies on the capitalrnmarkets for a majority of funding.</p

Mostrncountries, including the U.S. have average amortization periods of 20 to 30rnyears.  In a few countries, notably Spainrnand Finland, the period is much longer although 50 and 60 year mortgages arernnot widely used.  In Japan there is a multi-generationalrn100-year mortgage. </p

ThernU.S is also in the minority when it comes to pre-payment penalties.  In most countries except the U.S., Denmark,rnand Japan, fixed-rate mortgages are typically subject to penalties, usually torncompensate the lender for lost interest over the remaining term.  </p

The study says that, while some believe that the fixed-rate mortgagern(FRM) is the ideal consumer mortgage instrument for all borrowers; its use doesrnhave significant drawbacks. In effect, the cost of the pre-payment option isrnsocialized, with everyone paying a premium in the mortgagernrate for the option. This contrasts with the European view that onlyrnborrowers who exercise the option for financial advantage should pay the cost.</p

Non-performingrnmortgages were consistently below 2 percent in all of the nations studied fromrn2001 to 2007.  When the rate took off inrnthe U.S., it went up only slightly in the other countries.  Spain, Ireland, and Portugal topped out at lessrnthan 3 percent while the U.S. soared to 10 percent.</p

Regulationrnpost housing crisis may have a significant impact on future mortgage productrndesigns.  Thus far countries outside thernU.S. have made only minimal changes, mostly in the loan-to-value and loan tornincome areas.  However several countriesrnincluding Canada, Australia, and the UK have made or indicate they intend tornmake changes that will further tighten lending standards. </p

Thernstudy concludes by asking what will be the likely effects of the Dodd-Frankrnlegislation on mortgage product design. rnLea found that the legislation will likely perpetuate the move towardrnFRMs; gravitating toward “vanilla, qualified mortgages.”  Limiting or prohibiting pre-payment penaltiesrnconstrains the availability of lenders to match fund medium-term FRMs and willrnreduce the effectiveness of covered bonds as a financing technique forrnlenders.  “Qualifying ARM borrowersrnat a fully amortizing payment at the highest possible rate over a five-yearrnperiod is likely to reduce ARM qualification and volume.”</p

Thernstudy also concludes that legislative and regulatory restrictions on featuresrnlike interest only mortgages, low start rates, and negative amortization willrnreduce credit availability for many households and there will be less abilityrnto offset the tilt effect of FRMs where the burden of the mortgage is higher inrnthe early years.  </p

Finally,rn“lower default rates in (other countries) may reflect stricter enforcementrnof lender rights.  All countries in thernsurvey have recourse lending and anecdotal evidence suggests it is enforced </p

 “ThernU.S. housing market is not operating in a vacuum and therefore should not bernassessed in one. This study aimed to examine how different mortgage productsrnperform in various other countries to help better understand if the mortgage product designs themselves are flawed. Byrncomparing the performance of mortgage products internationally, we see thatrnmany countries are experiencing lower default rates than the U.S., despiternhaving a significant share of products such as adjustable rate mortgages andrninterest only loans. This indicates the problem with loan design in the U.S.rnduring the crisis was one of a mismatch between borrowers and particular loanrndesigns – not the existence of the loan features themselves. In addition, thernlower default rates may reflect stricter enforcement of lender rights as allrncountries in the survey have recourse lending.  By focusing regulation on loan product design, borrower choice will be deeplyrnimpacted as products that are commonplace in other countries will be consideredrn”unqualified” for American borrowers,” said Dr. Lea.

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