Jens Lunde

Mortgage Product Innovation in Advanced Economies: More Choice, More Risk

Abstract In many developed countries, house prices have been rising rapidly, mortgage debt has been increasing and affordability has worsened. It is in this context that the standard annuity mortgage is increasingly being supplanted by mortgages with non-standard features, such as longer terms or interest-only payments. Many of these new features aim to reduce the borrowers monthly debt service in the initial period of the loan. While these new mortgage types help households to enter owner-occupation and to vary their expenditure patterns, the long-term cost to the borrower cannot normally be less than for a standard product. Moreover, such mortgages can also be more risky: the interest-only borrower does not accumulate equity as an annuity borrower does, and loans with longer terms expose the borrower to greater risk of interest-rate or other economic shocks. As a result both borrowers pay more and the housing finance system may be more fragile. This paper brings together evidence from 13 developed countries about house prices, debt and affordability, and particularly the availability and market share of mortgages with these new features. It analyses trends over the last ten years and discusses the risks of these mortgages compared to standard annuity products.

Responding to the Housing and Financial Crises: Mortgage Lending, Mortgage Products and Government Policies

Abstract The long period of house price growth in markets across the world ended with the US and global financial crisis of 2007/08. The crisis and the consequent recession had profound effects on mortgage market actors – including households, institutions and governments – in most advanced economies, whether or not they participated in this rapid house price growth. Many of the trends observed during the boom, especially the innovations in financial instruments, were reversed. This paper presents evidence on how mortgage markets and stakeholders responded in the initial period after the crash. In particular it reports on a 2009 survey of housing experts from 16 industrialised countries, which concentrated on how each countrys mortgage system responded to the crisis and how governments addressed the problems of borrowers.

Financial Soundness Indicators for Owner Occupiers

Real house prices in Denmark turned downwards in 2007 after a sustained period of growth. The associated increases in borrowing left Danish owner occupiers as the most highly indebted in the OECD countries. With the downturn, signs of financial fragility in the housing market and in financial institutions are emerging. An analysis of the financial soundness of owner occupation and the impact on financial stability is topical. This paper employs a unique set of individual tax statistics data at the family level to estimate and follow certain ratios over the recent housing market cycle. The ratios for the 30–39-year-old owner occupiers, who may have bought recently and therefore are the most indebted, are examined. Both their housing wealth/income ratios and their net liability/income ratios had increased to ‘all-time high’ levels in 2005, while their influence remained at the same high level over the whole cycle. The ratios presented can be utilised as a set of financial soundness indicators both for categories of households and for the housing market to predict financial unsoundness, and to provide an early warning in the context of changes in the economic environment.

FIFTEEN YEARS WITH INDEX-LINKED MORTGAGES: SUCCESSES AND FAILURES

Index-linked mortgage loans were introduced in Denmark in 1982 in an inflationary environment. After 15 years, it is time to reevaluate the efficiency and relevance of that instrument in a low-inflation environment and an internationalized open capital market where, by 1996 for the first time, the outstanding value of indexed mortgage bonds dropped.By eliminating the inflation risk, inflation risk-averse investors should accept a lower yield on indexed bonds and the funding cost should be reduced. However, the opposite seems to be the result in the Danish case. There, the longest and the most risky mortgage bonds on the market were created as a precondition for receiving subsidies on social housing. The results has been an expensive budget deficit financing.In the private sector, debtors are free to choose between indexed and nominal loans to a rather limited extent. Indexed loans have been a failure. And the lack of a call option for prepayment has created problems in a very illiquid market.