Mortgage Costs Research Articles

The Impact of the Goods and Services Tax on Mortgage Costs: Evidence from Australian Mortgage Corporations

Australia has seen significant rises in mortgage costs and sharp declines in housing affordability in the past decade or so, which corresponds with the introduction of the Goods and Services Tax (GST) in July 2000. To what extent the GST has impacted mortgage costs is the research question. This study investigates the GST impact on the mortgage costs of Australian mortgage corporations. Using data of mortgage corporations operating in Australia, we perform t-tests and multivariate regression analysis to examine the GST effects on mortgage yield spreads. The empirical results clearly indicate that mortgage corporations increased their mortgage charges in the post-GST periods significantly beyond the magnitude of the GST. Furthermore, the lenders started to increase the yield spreads before and continued to increase the spreads after the implementation of the GST, indicating the rise in mortgage costs was not a one-off surge. The findings offer insights into mortgage costs and have significant policy implications and wider economic relevance.

Housing Prices and the High Chinese Saving Rate Puzzle

China’s over 25% aggregate household saving rate is one of the highest in the world. One popular view attributes the high saving rate to fast-rising housing prices in China. However, cross-sectional data do not show a significant relationship between housing prices and household saving rates. This article uses a simple consumption-saving model to explain why rising housing prices per se cannot explain China’s high household saving rate. Although borrowing constraints and demographic changes can translate housing prices to the aggregate saving rate, quantitative simulations of our model using Chinese time-series data on household income, housing prices, and demographics indicate that rising mortgage costs can increase the aggregate saving rate by at most 2 to 4 percentage points in the best down-payment structure.

The impact of the GST on mortgage yield spreads of Australian banks

Australia has experienced significant rises in mortgage costs and sharp declines in housing affordability in the past decade, which corresponds with the introduction of the Goods and Services Tax (GST) in the nation in July 2000. To what extent the GST has impacted mortgage costs is our research question. Using the mortgage loan data of all banks operating in Australia, this study investigates and measures the changes of mortgage yield spreads in the pre- and post-GST periods. Results show the bank lenders significantly increased their mortgage charges in the post-GST periods and the rise in mortgage charges was not a one-off impact. The findings have important financial, economic and policy implications.

Housing prices and the high Chinese saving rate puzzle

Abstract China's over 25% aggregate household saving rate is one of the highest in the world. One popular view attributes the high saving rate to fast-rising housing prices in China. However, cross-sectional data do not show a significant relationship between housing prices and household saving rates. This article uses a simple consumption-saving model to explain why rising housing prices per se cannot explain China's high household saving rate. Although borrowing constraints and demographic changes can translate housing prices to the aggregate saving rate, quantitative simulations of our model using Chinese time-series data on household income, housing prices, and demographics indicate that rising mortgage costs can increase the aggregate saving rate by at most 2 to 4 percentage points in the best down-payment structure.

Can Rising Housing Prices Explain China’s High Household Saving Rate?

China’s average household saving rate is one of the highest in the world. One popular view attributes the high saving rate to fast rising housing prices and other costs of living in China. This article uses simple economic logic to show that rising housing prices and living costs per se cannot explain China’s high household saving rate. Although borrowing constraints and demographic changes can help translate housing prices to the aggregate saving rate, quantitative simulations using Chinese data on household income, housing prices, and demographics indicate that rising mortgage costs contribute at most 5 percentage points to the Chinese aggregate household saving rate, given the down-payment structure of China’s mortgage markets.

Why a Government Role is Necessary for Smoothly Functioning Mortgage Markets

Many conservatives want to remove the government's role from the U.S. housing finance system, leaving private markets to meet the mortgage needs of U.S. residential home buyers. Looking at our country’s history and the experience of many other countries starkly illustrate the flaws inherent in this “purely private” approach. As this memo details, a full withdrawal of the federal government from the mortgage markets would lead to radical and catastrophic changes in the U.S. mortgage markets and thus our housing markets, including:• Limited availability of long-term, fixed-rate mortgages• Sharp increases in the cost of mortgages• Large reductions in the availability of mortgage credit• A higher systemic susceptibility to housing bubbles• A lack of mortgage credit during economic downturns

The limits of RESPA: An empirical analysis of the effects of mortgage cost disclosures

Congress passed the Real Estate Settlement Procedures Act (RESPA) in 1974 based upon documented instances of kickbacks between settlement service providers, unearned fees, and expensive and unnecessary closing costs paid by buyers and sellers of residential real estate. It opted for a disclosure strategy accompanied by few substantive prohibitions. Over the last 37 years, only a handful of studies attempted to measure the success of the mortgage loan disclosures. This article uses a uniquely rich database to examine this question. We find evidence that closing costs increased since 1972 and fee types proliferated. The early cost estimate underestimated the final closing costs and projected cash to borrowers in a majority of cases, lending credence to complaints of baiting and switching. These observations call into question the efficacy of the RESPA disclosure scheme. Further, they point to the need for detailed data collection, routine monitoring of whether RESPA is meeting its legislative intent, and rigorous debate about whether RESPA's goals can be achieved more effectively by another strategy. This article is particularly timely because Congress instructed the new Bureau of Consumer Financial Protection to combine RESPA and related Truth in Lending Act disclosures into a single, integrated form by the summer of 2012.

Housing busts and household mobility

Using two decades of American Housing Survey data from 1985 to 2007, we revisit the literature on lock-in effects and provide new estimates of the impacts of negative equity and rising interest rates on the mobility of owners. Both lead to substantially lower mobility rates. Owners suffering from negative equity are one-third less mobile, and every added $1000 in real annual mortgage costs lowers mobility by about 12%. Our results cannot simply be extrapolated to the future, but they do have potentially important implications for policy makers concerned about the consequences of the housing bust that began as our data series ended. In particular, they indicate that we need to begin considering the consequences of lock-in and reduced household mobility because they are quite different from those associated with default and higher mobility.

Does High Cost of Mortgage Debt Explain Why Young Adults Live with Their Parents?

Young adults leave their parents' homes at a higher rate in Northern Europe or in the United States than in Southern Europe, with broad implications on labor market mobility and on fertility. We assess if differences in household formation are associated to differences in access to credit by estimating the impact of the cost of a mortgage on the probability that a young adult leaves his or her parents' home. Exogenous changes in the cost of credit are identified using the reform in 1998 and the cancellation in 2002 of Credito Bonificado, a Portuguese program that provided four different reductions of the interest rate of mortgages signed by low- and medium-income youth. Using a unique data set that links administrative records of debt with the 1998–2004 waves of the Employment Survey, we document three findings. First, borrowing among young adults fell when borrowing costs increased. Second, the elasticity of new household formation with respect to net interest rates lies between −0.8 and −3.3. Third, young adults responded to the increase in mortgage costs by delaying home purchases or by reducing the quality of housing services purchased, but there was only a modest increase of the probability of renting a new accommodation. (JEL: D91, H24, J13)

Money Illusion and Housing Frenzies

A reduction in in‡ation can fuel run-ups in housing prices if people suer from money illusion. For example, investors who decide whether to rent or buy a house simply comparing monthly rent and mortgage payments do not take into account that in‡ation lowers future real mortgage costs. We decompose the price-rent ratio in a rational component -meant to capture proxy eect and risk premia -and an implied mispricing. We …nd that in‡ation and nominal interest rates explain a large share of the time-series variation of the mispricing, and that the tilt eect is unlikely to rationalize this …nding.

Housing Affordability in the United States: Income and Price Contributors

This paper examines the housing affordability problem in the United States. It uses the widely accepted measure of housing cost burden (the ratio of housing costs and income) as the measure of housing affordability for its analysis. Based on published data of the Joint Center for Housing Studies, it examines annual trends in rents, owner costs of housing, home prices and incomes over the period 1975 to 2001. The changes in the affordability situation over time are analyzed separately for renters and for owners. The paper also presents a picture of housing affordability in selected U.S. metropolitan areas for employees in different occupation groups. The paper concludes that the housing affordability problem for renters has been largely income-driven; on the other hand, for owners, changes in affordability have been related to changes in mortgage costs. A counter-cyclical monetary policy is seen as alleviating owner cost burdens during times of recession. The paper recommends that housing policy aimed at rental housing adopt a counter-cyclical focus, which it currently seems to lack.

Does Prepayment Risk of Mortgages Affect Excess Returns of Bank Stocks?

This paper explores the relationship between the prepayment risk embedded in conventional, fixed-rate residential mortgages and excess returns for bank stocks. There are two interesting findings in this study. First, commercial banks traded in the Nasdaq market are more meanvariance efficient than the other seven groups of industrial stocks. Second, the prepayment risk factor is significant for these banks. The prepayment risk mainly reflects a call option embedded in a mortgage plus foreclosure costs associated with a mortgage put option. This risk is measured by a remaining part of mortgage rates after excluding the influence of real estate market, maturity, and default risks on mortgage rates. The results of this study suggest that the prepayment risk factor does significantly affect excess returns for bank stocks in the period with high levels of mortgage refinancing activities.

Economic Factors Affecting Home Mortgage Disclosure Act Reporting

The release of the 2004-2005 Home Mortgage Disclosure Act data raised a number of questions given the increase in the number and percentage of higher-priced home mortgage loans and continued differentials across demographic groups. This paper assesses three possible explanations for the observed increase in 2005 over 2004: (1) changes in lender business practices; (2) changes in the risk profile of borrowers; and (3) changes in the yield curve environment. Results suggest that after controlling for the mix of loan types, credit risk factors, and the yield curve, there was no statistically significant increase in reportable volume for loans originated directly by lenders during 2005, though indirect, wholesale originations did significantly increase. The findings also reveal that the market price of risk increased by about 15 basis points in 2005 versus 2004, implying that mortgage costs increased for all borrowers on a risk-adjusted basis.

Determinants of Mortgage Debt Growth in EU Countries

Abstract This paper presents an analysis of mortgage debt growth in the EU-15 countries. Mortgage debt has risen quickly in many countries in recent years, reaching historically very high levels that increasingly attract the attention from both researchers and policymakers. While there are some papers on factors behind national mortgage debt developments, studies taking a broader approach, both regarding the number of countries included and the potential determinants of mortgage debt growth, are still lacking. This study aims at filling this gap and presents estimates for real mortgage debt growth for the EU-15 countries, using pooled regressions for the period 1982–2003. Special attention is paid to properly defining mortgage costs, for which an after-tax measure is constructed. The regressions indicate that real mortgage debt is affected by after-tax mortgage interest costs, by house prices, financial deregulation, and stock markets, while the effects of household disposable income and inflation are les...

The Effect of Housing Government-Sponsored Enterprises on Mortgage Rates

We derive a theoretical model of how jumbo and conforming mortgage rates are determined and how the jumbo–conforming spread might arise. We show that mortgage rates reflect the cost of funding mortgages and that this cost of funding can drive a wedge between jumbo and conforming rates. Further, we show how the jumbo–conforming spread widens when mortgage demand is high or core deposits are not sufficient to fund mortgage demand, and tightens as the mortgage market becomes more liquid and realizes economies of scale. Using Mortgage Interest Rate Survey data for April 1997 through May 2003, we estimate that the government-sponsored enterprise funding advantage accounts for about 7 basis points of the 15–18 basis point jumbo–conforming spread.

The determinants of mortgage yield spread differentials: Securitization

This paper examines securitization and mortgage yield spread differentials among four groups of Australian mortgage providers: mortgage corporations, commercial banks, building societies and credit unions. The dataset includes over 2000 observations of standard adjustable rate mortgages from 180 institutions. Several studies on the impact of securitization (e.g., reduced funding costs, information costs, agency costs, regulatory tax and improved mortgage marketability and liquidity) can be found, but there is a little empirical evidence, particularly in an Australian context. Our results suggest that mortgage corporations that securitize all their loans have both the narrowest nominal and effective yield spreads among the four groups, consistent with the existing securitization and mortgage cost literature. The regression findings also indicate that both minimum and maximum amounts of loans are significantly associated with spreads.

The Effect of Housing Government-Sponsored Enterprises on Mortgage Rates

We derive a theoretical model of how jumbo and conforming mortgage rates are determined and how the jumbo-conforming spread might arise. We show that mortgage rates reflect the cost of funding mortgages and that this cost of funding can drive a wedge between jumbo and conforming rates (the jumbo-conforming spread). Further, we show how the jumbo-conforming spread widens when mortgage demand is high or core deposits are not sufficient to fund mortgage demand, and tighten as the mortgage market becomes more liquid and realizes economies of scale. Using MIRS data for April 1997 through May 2003, we estimate that the GSE funding advantage accounts for about seven basis points of the 15-18 basis point jumbo-conforming spread.

The Effect of Housing Government-Sponsored Enterprises on Mortgage Rates

We derive a theoretical model of how jumbo and conforming mortgage rates are determined and how the jumbo-conforming spread might arise. We show that mortgage rates reflect the cost of funding mortgages and that this cost of funding can drive a wedge between jumbo and conforming rates (the jumbo-conforming spread). Further, we show how the jumbo-conforming spread widens when mortgage demand is high or core deposits are not sufficient to fund mortgage demand, and tighten as the mortgage market becomes more liquid and realizes economies of scale. Using MIRS data for April 1997 through May 2003, we estimate that the GSE funding advantage accounts for about seven basis points of the 15-18 basis point jumbo-conforming spread.

A comparative analysis of the net cost of a mortgage for homeowners in Europe

Judging from the high loan-to-income ratios in the Netherlands, Denmark and the United Kingdom, it appears that owner-occupiers in Northwest Europe are prepared to take on substantially higher mortgages than owner-occupiers in Southern Europe. In addition, loan-to-income ratios are usually seen as synonymous with risk. However,in an adequate risk assessment the size of the mortgage is less important than the actual mortgage cost it represents. It is difficult to compare actual mortgage costs in an international perspective because of differences in financing (type, duration, fixed-interest period) and in the institutional context. This is further compounded by additional costs and fiscal and non-fiscal subsidies. This paper sets out a method (i.e. actual net interest) for drawing a more genuine comparison between the mortgage costs in different European countries, taking into account the above-mentioned aspects.

The Effects of Securitization on Consumer Mortgage Costs

We examine the effects of securitization on two dimensions of consumer mortgage costs: coupon rates and loan origination fees. We find no evidence that securitization reduces the coupon rates on fixed‐ or adjustable‐rate mortgages. Instead, securitization appears to lower mortgage loan origination fees, resulting in substantial savings for consumers. Securitization activity includes passthrough creation and collateralized mortgage obligation (CMO) creation. We test for differences between the effects of passthrough and CMO creation on primary mortgage costs. Surprisingly, these activities appear to have indistinguishable effects on loan rates and origination fees, suggesting that a large derivatives market for mortgage loans is not creating value for consumers.