The Dodd-Frank Bill could could dramatically limit the types of loans offered in the United States according to a new report from the Mortgage Bankers Association. The study found that mortgage features restricted in the bill such as longer terms, interest-only periods and flexible payment designs are quite common in other countries and are not associated with higher rates of default.
Conducted by Dr. Michael Lea, Director of the Corky McMillin Center for Real Estate at San Diego State University and sponsored by MBA’s Research Institute for Housing America (RIHA), the 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.
“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 Dr. Lea. “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.”
According to the report, 95 percent of new loans made in the U.S. 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. In addition, 5 percent of new loans made in the U.S. in 2009 were variable rate, which compares to the higher shares found in other countries including, 92 percent in Australia and Korea, 91% in Ireland, 47 percent in the UK and 38 percent in Japan.
After comparing the performance of mortgage products internationally, the study found 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,” said Dr. Lea. “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,” said Dr. Lea.