Monthly Mortgage Research Articles

Public Disclosure and Consumer Financial Protection

AbstractThe U.S. Consumer Financial Protection Bureau has released a database of consumer complaints about banks’ financial products to the public since 2013. We find a greater reduction in mortgage applications to banks that receive more mortgage complaints in local markets after the disclosures. The effect is stronger in areas with more sophisticated consumers and higher credit competition, and for banks receiving more severe complaints. The number of monthly mortgage complaints per bank exhibits faster mean reversion after the publication of the database. These findings suggest that the public disclosure of mortgage complaints enhances product market discipline and consumer financial protection.

Summaries of Articles

Summaries of Articles

Premature repayment of fixed interest mortgage loans without compensation, a case of misguided consumer protection in the EU

Consumer protection shifts risks from consumers to businesses. This raises marginal costs and equilibrium prices. It is justified when markets are not strong enough to allocate contractual risks or accident risks efficiently, especially in cases of severe asymmetric information between suppliers and consumers. Consumer protection can then increase the consumer’s expected welfare from a contract. We test these considerations in a theoretical and empirical study on consumers' right to early repayment of mortgage loans without damage compensation to the creditor in the European Union. We show in a formal model that such a right can lead to an impairment of consumer welfare, compared with the traditional rule of expectation damages for breach of contract. This applies if the consumer is risk averse and repays a loan with a high interest rate in a low interest period to take up a new loan for the same project at lower interests. From a theoretical point of view, this right has no solid economic underpinning, if it is not restricted to cases of personal hardship of the consumer and serves an insurance purpose. We present empirical evidence supporting this argument. In a panel study on monthly mortgage interest rates of 23 EU Member States between 2005 and 2017 we show how interest rate spreads change with the level of consumer protection.

Understanding the Economic Situation of People Who Took a Foreign Currency Mortgage in Hungary and Poland

In this article we show that significant differences between the foreign currency mortgage agreements in Hungary and Poland led to significant differences in monthly mortgage payments after the Global Financial Crisis (GFC) erupted. Hungarian banks were able to add a variable markup to the LIBOR3M that was connected to bank risk on top of the usual fixed markup. We compare the monthly mortgage payments and LTV levels of people who took out a CHF mortgage with those who obtained a local currency mortgage during the mortgage boom years of 2006–2008. We find that in the initial years of the mortgage CHF mortgages were cheaper than local currency mortgages, which allowed more people to buy housing. However, the GFC led to a deterioration of the exchange rate, and monthly payments and LTV levels (consequently?) increased. We analyse the mortgage costs and LTV levels of the 2006-2008 foreign currency (FX) mortgage vintages in Hungary and Poland between 2006 and 2020 and compare them to local currency mortgages. We also simulate the effects of changing housing prices and wages on mortgages in the cities of Budapest and Warsaw.

Potential Changes to the FHA COVID-19 Modification Options to Keep More Borrowers in Their Homes

Millions of homeowners are having difficulty affording their monthly mortgage payments because of the COVID-19 pandemic. The most vulnerable group of borrowers is concentrated within the Federal Housing Administration (FHA) program, with over 900,000 borrowers who are more than 90 days delinquent. Research provides clear evidence that immediate and substantial payment reduction is the most effective mortgage default prevention tool available. This paper suggests several changes to the FHA COVID-19 Home Retention Options that FHA should consider to provide more borrowers with deeper payment reductions, many at no cost to the Mutual Mortgage Insurance Fund, that would provide borrowers in need of financial assistance with greater eligibility as well as more substantial payment reductions that help them retain their home and avoid foreclosure. We estimate the incremental payment relief and resulting reduction in foreclosures that would be created by each of our proposed changes, and demonstrate how our suggestions would increase the availability of mortgage modifications for borrowers with lower incomes and higher debt-to-income ratios, particularly Black and Hispanic borrowers.

Housing Policies: The Experiences and Constraints of Housing Industry in Ghana

Ghana housing policies in the pre- and post- independence have not been consistent and sustainable. Whiles the colonial government adopted self-help projects and piloted research findings, policies after independence focused on social housing, affordable housing and Public Private Partnership (PPP) projects. The impact of these policies did not improve the performance of the main stakeholders in the housing industry, thereby resulting to inadequate houses in most communities in Ghana. The research sought to identify the main challenges encountered by stakeholders in relation to government housing policies. The study adopted the exploratory and thematic literature review to ascertain the experiences and constraints faced by the Housing Industry (HI) in Ghana in relation to Ghana Housing Policies (GHP). The principle of demand and supply which determine the price mechanism in the housing market constitutes the theoretical orientation of the study. As such, challenges created by the housing policies in Ghana were related to the factors of demand and supply, principle of price mechanism and experiences of the global world and well as increase in urban shelter deviant rate. A comprehensive analysis was undertaken to reveal key findings on the challenges of the individual stakeholders namely households, financial institutions, estate developers and government land sector agencies. It was realized that prices of houses in Ghana were high in relation to households’ incomes. And that, the loan requirements of mortgage institutions of payment of 30% deposit, 50% monthly mortgage and 10 years mortgage term were unbearable by most households. It was recommended that estate developers should undertake demand assessment of households and the government should implement sustainable policies, hence reduce urban shelter deviant rate.

THE NATURE OF MORTGAGE REPAYMENT PLANS IN GHANA

Mortgage finance is one source of capital that cannot be ruled out when it comes to housing finance. It has globally aided many countries in terms of housing finance. A country’s housing finance system can work effectively if there is/are mortgage repayment plan(s) that would ensure flexibility in repayment of mortgage loans and encourage supply and demand for mortgage products. The study sought to find out the types and nature of mortgage repayment plans in Ghana. All the financial institutions which were into mortgage banking constituted the sample. The result shows that fixed rate method is the commonest method used in Ghana and other repayment plans have evolved from the fixed rate repayment plan. Exchange rate fluctuations, high interest rates and high house prices result in higher initial monthly mortgage repayment using the fixed rate repayment plan. It is recommended that mortgage lending institutions should reduce their interest rate for low middle income earners in Ghana to qualify for mortgage.

Public Disclosure and Consumer Financial Protection

The U.S. Consumer Financial Protection Bureau has accepted complaints about banks’ financial products and services since 2011 and has released the complaint database to the public since 2013. We analyze the effectiveness of this public disclosure in protecting mortgage borrowers. We find a greater reduction in mortgage applications to banks that receive more mortgage complaints in local markets after the disclosure. The effect is stronger in areas with more sophisticated consumers and higher credit competition, and for banks receiving more severe complaints. The number of monthly mortgage complaints per bank exhibits faster mean reversion after the publication of the database. Our findings suggest that the public disclosure of banks’ provision of inferior products and services enhances product market discipline and consumer financial protection.

Mexico’s housing crisis: vacancy, limited access & Deaf policy responses

ABSTRACT During the 2000s, millions of Mexicans acquired mortgages to buy homes in the fringes of cities throughout the country. Many such households have faced limited access to services, infrastructure and employment, and have seen their monthly mortgage payments increase while their debt remains virtually unchanged. In parallel, while about a third of Mexicans still live in poor housing conditions, numerous newly built developments have exhibited alarmingly high housing vacancy rates. Such coexistence of housing vacancy and shortages exposes considerable tensions in Mexican housing policy between the social and the economic values of housing. While previous analyses have centred on the financialization of housing policy in Mexico, this paper examines some of the local, political and socioeconomic implications of recent federal housing finance policy and urban development patterns, particularly as they relate to housing access and vacancy. Furthermore, this paper discusses the more recent evolution of Mexico’s housing and urban development policy, as well as the juxtaposition of the institutional and civic responses that have emerged to make front to previous financialization and housing development patterns and their implications.

An Assessment on the Housing Auction Market in Selangor

The first auction legislation in Malaysia was enacted in the states of Penang and Malacca in 1906. The real estate market including auction market is considered an effective method in selling real estate properties (Chyi, 2015). Auction is one method in selling property in a quick way but this method is consider as force sales as most properties sold due to owner unable to pay the monthly mortgage to the bank. There are advantages of buying property in auction market where the buyer can get the property cheaper than market value and the property usually has a matured environment. The downside of purchasing an auction property is that the buyer is not allowed to view or inspect the inside of the property and sometimes the property is not vacant by the owner. The buyer need to conduct their own research first if they have the intention to buy auctioned property. Based on literatures, there are various considerations for buying auction properties such as the type of properties, the location, value, existing conditions, the existing facilities and infrastructure and many more. This aim of the study is to assess the issues and problems faced by buyers in housing auction market in Selangor. The objectives were to identify the preferred location among the respondents in selection their bidding units. It was found that among respondents, the most preferred location of auction properties was in Gombak. In term of issues and problem in buying auction properties, respondents claimed the issues are the long period of time in getting loan approved and released payment , the title and ownership issues, the units are still occupied by owner, the conditions of units and the overall cost that need to be prepare by buyers. It is hoped that this paper would guide decision maker and government in planning of the overall housing market in Malaysia as properties being auctioned is getting higher over time.Keywords: Auction, Purchaser, Property, SelangoreISSN: 2398-4287 © 2019. The Authors. Published for AMER ABRA cE-Bs by e-International Publishing House, Ltd., UK. This is an open access article under the CC BYNC-ND license (http://creativecommons.org/licenses/by-nc-nd/4.0/). Peer–review under responsibility of AMER (Association of Malaysian Environment-Behaviour Researchers), ABRA (Association of Behavioural Researchers on Asians) and cE-Bs (Centre for Environment-Behaviour Studies), Faculty of Architecture, Planning & Surveying, Universiti Teknologi MARA, Malaysia.DOI: https://doi.org/10.21834/e-bpj.v4i12.1935

Making Use of Home Equity: The Potential of Housing Wealth to Enhance Retirement Security

The demographic change underway, declining adequacy levels from traditional pay-as-you-go old-age social security systems, structural reforms in pension schemes and the reduction in the traditional family support have increased the need for additional private savings to cover the old age income gap. In this paper we discuss the necessity, the role and the viability of home equity release schemes in supplementing public and private pensions in an integrated way. We use the latest European data from the Eurosystem Household Finance and Consumption Survey (HFCS) to analyse the household's wealth composition and accumulation process in the euro area. To quantify the size of the housing wealth and its potential to enhance existing and future retirement income, we compute the equity-to-value ratio (ETV) for all countries, estimate the time to loan payoff and compute the amount of home equity that is expected to be released over a 10-year period through regular monthly mortgage payments. We then catalogue and discuss the many alternative options for managing and accessing housing wealth over the life cycle, and highlight the main characteristics, risks, advantages and drawbacks of the two most important market products (home reversion plans and reverse mortgages). Finally, we discuss the main demand-side and supply-side obstacles and challenges to the development of equity release markets and extract some policy implications.

DETERMINING HOUSING AFFORDABILITY FOR YOUNG PROFESSIONALS IN KLANG VALLEY, MALAYSIA: RESIDUAL INCOME APPROACH

Underprivileged young professionals in housing affordability are prone to an adverse effect on their well-being. This article empirically examines housing affordability among young professionals aged between 25 and 35 years old who work or live in Klang Valley. Young professionals in this paper refer to young graduates with at least a Bachelor’s degree and are registered to professional institutions such as the Institution of Engineers Malaysia (IEM), Malaysian Institute of Architects (MIA), Malaysian Institute of Planners (MIP), and Royal Institution of Surveyor Malaysia (RISM). The aim of this study is to measure housing affordability based on residual income approach and to identify the attribute that affects young professionals’ housing affordability. Adequacy of household income for monthly mortgage or rent as well as other non-housing goods is reflecting for housing affordability. Attributes namely occupation, the presence of children, household expenditure, transportation cost, vehicle instalment, education loan, and household income are analysed by using binary logistic regression. 264 respondents who are either a homeowner, tenant, or parental home resident were selected by using simple random sampling. The survey data were collected through the professional institutions respectively. The study found that only presence of children, occupation of urban planner and education loan III (not taking a loan) were insignificant to the model.

DETERMINING HOUSING AFFORDABILITY FOR YOUNG PROFESSIONALS IN KLANG VALLEY, MALAYSIA: RESIDUAL INCOME APPROACH

Underprivileged young professionals in housing affordability are prone to an adverse effect on their well-being. This article empirically examines housing affordability among young professionals aged between 25 and 35 years old who work or live in Klang Valley. Young professionals in this paper refer to young graduates with at least a Bachelor’s degree and are registered to professional institutions such as the Institution of Engineers Malaysia (IEM), Malaysian Institute of Architects (MIA), Malaysian Institute of Planners (MIP), and Royal Institution of Surveyor Malaysia (RISM). The aim of this study is to measure housing affordability based on residual income approach and to identify the attribute that affects young professionals’ housing affordability. Adequacy of household income for monthly mortgage or rent as well as other non-housing goods is reflecting for housing affordability. Attributes namely occupation, the presence of children, household expenditure, transportation cost, vehicle instalment, education loan, and household income are analysed by using binary logistic regression. 264 respondents who are either a homeowner, tenant, or parental home resident were selected by using simple random sampling. The survey data were collected through the professional institutions respectively. The study found that only presence of children, occupation of urban planner and education loan III (not taking a loan) were insignificant to the model.

Financing affordable and sustainable homeownership with Fixed-COFI mortgages

The 30-year fixed-rate fully amortizing mortgage (or “traditional fixed-rate mortgage”) was a substantial innovation when first developed during the Great Depression; however, it has three major flaws. First, homeowner equity accumulates slowly during the first decade. Many lenders require large down payments because of slow equity accumulation. Second, in each monthly mortgage payment, homeowners substantially compensate capital markets investors for the ability to prepay. The homeowners might have better uses for this money. Third, refinancing mortgages is often very costly. Expensive refinancing may prevent homeowners from taking advantage of falling rates.To resolve these three flaws, we propose a new fixed-rate mortgage, called the Fixed-Payment-COFI mortgage (or “Fixed-COFI mortgage”). This mortgage has fixed monthly payments equal to payments for traditional fixed-rate mortgages and does not require a down payment. Also, unlike traditional fixed-rate mortgages, Fixed-COFI mortgages do not bundle mortgage financing with compensation paid to capital markets investors for bearing prepayment risks; instead, this money is directed toward lower monthly payments or toward purchasing the home. The Fixed-COFI mortgage exploits the often-present prepayment-risk “wedges” between the fixed-rate mortgage rate and the estimated cost of funds index (COFI) mortgage rate. In addition, the Fixed-COFI mortgage is a highly profitable asset for many mortgage lenders.We discuss two variations of the Fixed-COFI mortgage. In the first variation, homeowners with “Affordable” Fixed-COFI mortgages are rebated the “wedges” between the traditional fixed-rate mortgage payments and the COFI mortgage payments. After the “wedges” are rebated, these homeowners may pay substantially less to purchase their homes in 30 years than homeowners with traditional fixed-rate mortgages. This mortgage design may help alleviate housing affordability pressures in many areas of the United States.The other variation of Fixed-COFI mortgage is the “Homeownership” Fixed-COFI mortgage. With the “homeownership” Fixed-COFI mortgage, the homeowner commits to a savings program based on the difference between fixed-rate mortgage payments and payments based on COFI plus a margin. The homeowner uses this “wedge” to accumulate home equity quickly. The Homeownership Fixed-COFI mortgage may help some renters gain access to homeownership. For example, these renters may be paying rents as high as comparable mortgage payments in high-cost metropolitan areas but may not have enough savings for a down payment. With less need for a down payment, the Fixed-COFI mortgage may help such renters with stable income—but no savings—purchase homes.

Local labor market shocks and residential mortgage payments: Evidence from shale oil and gas booms

Frequently, housing is the largest item on a household's balance sheet, and therefore making monthly mortgage payments is often both the largest regular expenditure as well as a primary savings vehicle for households. However, changes to economic conditions impact household spending and savings decisions. To investigate the dynamics of this relationship, we examine mortgage payment choices of homeowners who purchased property in areas that later experienced a positive shock to local economic conditions via the shale oil and gas boom. We find that borrowers with properties located in areas with shale oil and gas booms experienced a 6% reduction in the probability of missing a mortgage payment over the period 2007–2014. Indexing these results to the size of the boom, we find that one hundred additional rigs (billion dollars of oil and gas produced) are associated with a 3.2% (1.6%) decrease in default. Additionally, we find differential effects on housing markets across geography, time, loan leverage, and credit risk categories.

Mortgage finance and culture

AbstractUsing a nationally representative sample of 12,344 immigrants from 41 different countries of ancestry living in Spain in 2007, we find that the higher the housing‐loan penetration in the country of ancestry, the higher the likelihood of having a mortgage in Spain. Similarly, the higher the mortgage depth in the country of ancestry, the higher the present value of the monthly mortgage payments. Our results suggest that social norms regarding mortgage finance in the country of ancestry matter in determining immigrants’ mortgage finance in the host country. More specifically, the effect of social norms on the decision to have a mortgage (the extensive margin) and the amount of the mortgage payments (the intensive margin) is about one third and tenth the size of the effect of having a college degree on mortgage debt, respectively. Evidence of strong persistence of culture among those with longer tenure in the host country, those who immigrated as children or young adults, and second‐generation immigrants suggests that vertical transmission of beliefs (from parents to children) is a plausible channel of transmission. Perhaps most importantly, we find that cultural attitudes regarding property rights are most relevant when explaining individuals’ decision to get a mortgage, but those regarding credit information matter most when explaining the amount of the mortgage debt.

Financing Affordable and Sustainable Homeownership with Fixed-COFI Mortgages

The 30-year fixed-rate fully amortizing mortgage (or “traditional fixed-rate mortgage”) was a substantial innovation when first developed during the Great Depression. However, it has three major flaws. First, because homeowner equity accumulates slowly during the first decade, homeowners are essentially renting their homes from lenders. With this sluggish equity accumulation, many lenders require large down payments. Second, in each monthly mortgage payment, homeowners substantially compensate capital markets investors for the ability to prepay. The homeowners might have better uses for this money. Third, refinancing mortgages is often very costly. Expensive refinancing may prevent homeowners from taking advantage of falling rates. To resolve these three flaws, we propose a new fixed-rate mortgage, called the Fixed-Payment-COFI mortgage (or “Fixed-COFI mortgage”). This mortgage has fixed monthly payments equal to payments for traditional fixed-rate mortgages and does not require a down payment. Also, unlike traditional fixed-rate mortgages, Fixed-COFI mortgages do not bundle mortgage financing with compensation paid to capital markets investors for bearing prepayment risks; instead, this money is directed toward lower monthly payments or toward purchasing the home. The Fixed-COFI mortgage exploits the often-present prepayment-risk “wedges” between the fixed-rate mortgage rate and the estimated cost of funds index (COFI) mortgage rate. In addition, the Fixed-COFI mortgage is a highly profitable asset for many mortgage lenders. We discuss two variations of the Fixed-COFI mortgage. Homeowners with “affordable” Fixed-COFI mortgages are rebated the “wedges” between the traditional fixed-rate mortgage payments and the COFI mortgage payment. After the “wedges” are rebated, these homeowners may pay substantially less to purchase their homes in 30 years than homeowners with traditional fixed-rate mortgages. This mortgage design may help alleviate housing affordability pressures in many areas of the United States. The other variation of Fixed-COFI mortgage is the “homeownership” Fixed-COFI mortgage. With the “homeownership” Fixed-COFI mortgage, the homeowner commits to a savings program based on the difference between fixed-rate mortgage

Mortgage Modifications after the Great Recession: New Evidence and Implications for Policy

In the aftermath of the Great Recession, various mortgage modification programs were introduced to help homeowners struggling to make their monthly mortgage payments remain in their homes. We use mortgage data at the individual borrower level, joined to credit card spending and deposit account data, to investigate the relative importance of changes in monthly mortgage payments and long-term mortgage debt on default and consumption. We first quantify the variation in payment reduction offered by these modification programs and then use the variation in payment and principal reduction experienced by program recipients to estimate the impact of payment and principal reduction on default and consumption. First, we find that payment reduction for borrowers with similar payment burdens varied by two to three times across different modification programs. Borrowers with a high mortgage payment to- income (PTI) ratio received more than twice the payment reduction from HAMP compared to the GSE program. Borrowers with a low mortgage PTI ratio received three times the payment reduction from the GSE program compared to HAMP. Second, a 10 percent mortgage payment reduction reduced default rates by 22 percent. Third, for borrowers who remained underwater, mortgage principal reduction had no effect on default. This suggests that “strategic default” was not the primary driver of default decisions for these underwater borrowers. Fourth, for borrowers who remained underwater, mortgage principal reduction had no effect on consumption. Finally, default was correlated with income loss, regardless of debt-to-income ratio or home equity. Mortgage default closely followed a substantial drop in income. This pattern held regardless of pre-modification mortgage PTI or loan-to-value ratio, suggesting that it was an income shock rather than a high payment burden or negative home equity that triggered default. These findings suggest that mortgage modification programs that are designed to target substantial payment reduction will be most effective at reducing mortgage default rates. Modification programs designed to reach affordability targets based on debt-to-income measures without regard to payment reduction or target a specific LTV ratio while leaving borrowers underwater may be less effective at reducing defaults. Furthermore, policies that help borrowers establish and maintain a suitable cash buffer that can be used to offset an income shock could be an effective tool to prevent mortgage default. Both high and low mortgage PTI borrowers experienced a similar income drop just prior to default, suggesting that even among those borrowers with “unaffordable” mortgages, it was a drop in income rather than a high level of payment burden that triggered default.

Improving the 30-Year Fixed-Rate Mortgage

The 30-year fixed-rate fully amortizing mortgage (or "traditional fixed-rate mortgage") was a substantial innovation when first developed during the Great Depression. However, it has three major flaws. First, because homeowner equity accumulates slowly during the first decade, homeowners are essentially renting their homes from lenders. With so little equity accumulation, many lenders require large down payments. Second, in each monthly mortgage payment, homeowners substantially compensate capital markets investors for the ability to prepay. The homeowner might have better uses for this money. Third, refinancing mortgages is often very costly. We propose a new fixed-rate mortgage, called the Fixed-Payment-COFI mortgage (or "Fixed-COFI mortgage"), that resolves these three flaws. This mortgage has fixed monthly payments equal to payments for traditional fixed-rate mortgages and no down payment. Also, unlike traditional fixed-rate mortgages, Fixed-COFI mortgages do not bundle mortgage financing with compensation paid to capital markets investors for bearing prepayment risks; instead, this money is directed toward purchasing the home. The Fixed-COFI mortgage exploits the often-present prepayment-risk wedge between the fixed-rate mortgage rate and the estimated cost of funds index (COFI) mortgage rate. Committing to a savings program based on the difference between fixed-rate mortgage payments and payments based on COFI plus a margin, the homeowner uses this wedge to accumulate home equity quickly. In addition, the Fixed-COFI mortgage is a highly profitable asset for many mortgage lenders. Fixed-COFI mortgages may help some renters gain access to homeownership. These renters may be, for example, paying rents as high as comparable mortgage payments in high-cost metropolitan areas but do not have enough savings for a down payment. The Fixed-COFI mortgage may help such renters, among others, purchase homes.

Spendthrifts and Savers: Are Canadians Acting Like They Are House Poorr Or House Richh?

Are Canadians acting like they are “house poor” and scrimping on spending in other parts of their lives because of what they pay for homes? What is interesting about this question is the fact that Canadian monthly mortgage bills, measured by the mortgage debt-service ratio, are approximately the same in size as they have been historically. The issue with a flat mortgage debt-servicing ratio, however, is it masks debt composition between interest and principal. With interest rates near zero, it is more likely that rates will rise in the future, causing an increase in mortgage debt-servicing costs. Furthermore, as we are more than seven years removed from the last recession, and there are strong arguments to suggest we have a housing-market bubble in our largest cities, there is additional risk of a negative economic shock. A high-leverage environment would exacerbate this situation. Using Statistics Canada mortgage-debt data broken down between interest and principal, my results suggest that Canadian households, on aggregate, have not slowed non-housing consumption due to this riskier debt environment. Furthermore, households have spent out of accumulated housing wealth, suggesting the removal of a buffer, potentially worsening any negative economic shock should house values fall. While these results are concerning, I find a lack of consumption sensitivity to increases in total debt-servicing costs. The implication is that the risk to Canadian households comes more from a negative economic shock than from rising interest rates that raise monthly mortgage payments. From a policymaking perspective, the Bank of Canada can use these results to help model the economy now and into the future given current debt dynamics. Being prepared for a potentially larger consumption impact from a negative economic shock is prudent. Governments at all levels should continue to monitor the effectiveness of their demand-side policies while considering what supply-side policies may be more appropriate in slowing down housing prices and cheap credit growth, thereby lowering debt loads. Options for the government to consider include the balancing of environmental concerns with housing supply growth, pricing the use of infrastructure, and making the application process for development more efficient and transparent.