Mortgage Instrument Research Articles

الرهن وأهميته في توثيق الديون: دراسة حالة المصارف الإسلامية

This research aims to explain the nature of the mortgage instrument by reviewing its definition and provisions in Islamic law. As well as knowing the importance of this tool in documenting debts in Islamic banks. To achieve these goals, the paper was divided into six sections that briefly cover the subject of mortgage jurisprudentially, with a focus on mortgage applications in the case of Islamic banks.

Anticipating a Reverse Mortgage Adoption in Croatia

Abstract Reverse mortgage is an alternative source of financing of elderly population that usually has some homeownership, but insufficient income and savings to support desired or indispensable level of consumption. It is a financial innovation mostly provided by banks and finance companies to seniors, which enables a home equity conversion to liquidity without selling or leaving a property. In circumstances of ageing society, modest pension income, increasing long-care expenditures, limited access to loan market and high risk of poverty, a reverse mortgage product has a solid ground for implementation and adoption. Croatia is an ageing country with negative demographic trends, which accelerated in the last few years. Retired population which is “home rich and cash poor” is particularly vulnerable and at strike to sustain a decent life. Therefore, we raised a question concerning the justification of the reverse mortgage introduction in Croatia. After giving an insight into some contextual factors, an estimation of the potential demand for reverse mortgage service in Croatia was made by carrying out an exploratory – pilot study with around 120 questionnaire respondents. We found out that there is a poor knowledge about the reverse mortgage among Croatian financial consumers (i.e. only 24% of respondents are familiar with the reverse mortgage term), as well as the lack of demand for this home equity extraction instrument. Namely, almost 67% of respondents would not accept a reverse mortgage instrument regardless of the circumstances, primarily due to socio-cultural reasons.

Modelling the profitability of reverse mortgage loans with life-long annuity payments

The article deals with the economic mechanism of reverse mortgage as a loan product aimed at raising the welfare of senior citizens who own real estate, for organic farming and soil management. The article discusses the financial and historical aspects of the implementation of the reverse mortgage instrument, as well as defines a potential of implementation of this instrument in Russia. Having identified the potential, the authors also mentioned the factors that could prevent Russian banks from adopting this mechanism. The article addresses one specific factor – absence of adequate instruments to predict and evaluate financial performance of reverse mortgage instruments. Consequently, the aim of the current paper is to create a mathematical model of reverse mortgage loan; specifically, current paper focuses on reverse mortgage loan with life-long annuity payments. In order to derive such model, the authors adopted a perspective, according to which loans are perceived as specific products present on an open market. As a result, we have obtained a model that allows lenders to calculate expected gains from reverse mortgage loans with respect to unknown loan span and varying demand, thus diminishing the uncertainty about reverse mortgage properties and making this financial product more attractive and for agricultural planning and economic, agricultural logistics and transport, et al.

On the Maximization of End-of-Loan Homeowner Wealth Using a Hybrid Security

The performance of a hybrid mortgage instrument is examined, which is structured as a managed fund with a 5-and-20 rule: viz. the management entity earning a 5% fee based on portfolio value and a 20% fee on all returns in excess of 8%. It is demonstrated that the hybrid security is able to outperform a conventional mortgage over 80% of the time and return to the homeowner a total portfolio value in excess of 85% of the initial loan value, allowing for a substantial increase in mortgage-based cash flows for the lender and sizeable retirement savings for the borrower.

Critical factors affecting affordability of mortgage housing in Kenya

This study investigated factors affecting affordability in the mortgage housing sector in Kenya. Housing affordability is a major problem experienced by urban households in Africa. According to the African Development Bank (The middle of the pyramid: Dynamics of the middle class in Africa, market brief, 2011), only three per cent of the entire African population can afford a mortgage. In Kenya, the Centre for Affordable Housing Finance in Africa has estimated that only eleven per cent of urban households earn enough to support a mortgage. Attempts were made in this study to develop an empirical model to reveal the underlying factors affecting housing affordability in Kenya. Applying a multiple regression approach, the model identified that affordability of mortgage housing in Kenya is significantly driven by clusters of factors related to the households’ social-economic factors, property attributes, loan characteristics and the macroeconomic environment. Specifically, the interest on mortgage, number of households’ dependents, loan-to-value ratio, type of mortgage instrument, number of income earners in a household, real gross domestic product per capita and size of household are the critical factors affecting affordability with the greatest contribution to the affordability problems of households in the mortgage housing sector in Kenya.

International Comparison Analysis of Housing and Mortgage Markets; Australia, Japan and the United Kingdom, Case of Japan

This paper is part of the project of the international comparison analysis of household behavior of mortgage choice and its demand. It includes Australia, Japan and the United Kingdom. Before the estimation of the household mortgage choice and the mortgage demand functions using the pooled data of three countries, a brief survey of demographics, macro economy, financial conditions, housing market, and mortgage market in each countries are presented. This paper provides the case of Japan. Japan has been suffering from deflation for a long time and sluggish economy as well. Japan experiences population decreasing and rapid aging, jointly with fertility declining, which affect negative impact on potential growth rate. These demographic factors impact the timing of purchasing house, especially young households. Young homeownership rate has been declining for several decades and still low compared with other countries. On the other hand the homeownership rate on average is almost stable for decades. In the wake of population aging and fertility declining, vacancy rate is growing for several decades. Deflation still continues and GDP growth rates are still low, sometimes being negative. After the Great Financial Crisis (GFC) housing market has been stagnant and then also does mortgage market. There are various kinds of mortgage instrument in Japan; from ARM (Adjustable Rate Mortgage, Variable Rate Mortgage), short-term FRM to long-term FRM (Fixed Rate Mortgage). Therefore borrowers have potentially a large option for selecting instrument, which especially induces borrowers’ smoothing refinance jointly with lower fee for it. Recent historically low interest rate policy by BOJ (Bank of Japan) is supposed to induces household to take up housing loan, however, mortgage market is not so active. Under these condition, households intend to prefer ARM to FRM and ARM share has been growing largely. This trends is slightly depressed recently due to the negative interest policy, however, ARM share is still large compares to before GFC period. Taking into consideration the fact that, although interest spread has been narrow, borrowers select ARM, household behavior of mortgage choice depends not only mortgage rate but also other factors such as income variation and borrowers’ expectation on income, price and interest rates. As for household wealth, Japanese households prefer safe assets to risky assets. Housing wealth has a large part of household wealth in Japan, which is a common feature in developed countries. Taking account of that Japanese household is a risk averter, it should be noted that housing wealth becomes a risky one due to decreasing of the house price.

Income Risk and Mortgage Choice Among Japanese Households

This paper empirically examines the relationship between income risk and mortgage instrument choice among Japanese households. Since theoretical predictions about the impact of income risks on mortgage choice are mixed, it is important to investigate empirically whether or not risky households borrow ARM loans. In order to answer this question, we construct several measures of income variability and unemployment risk that capture the income risk of the specific household. Our empirical result suggests that these income risk measures are in general negatively associated with the choice of fixed-rate mortgage contract, indicating that risky borrowers are more likely to choose adjustable-rate mortgages. Furthermore, we also find that the impact of income risk on the mortgage choice depends critically on the individual risk preferences. While there is significantly negative impact of income variability and unemployment risk on the mortgage choice for the risk averse borrowers, no systematic relationship can be found for borrowers with low risk aversion.

Regional Differences in Mortgage Demand and Mortgage Instrument Choice in the UK

Koblyakova A., Hutchison N. and Tiwari P. Regional differences in mortgage demand and mortgage instrument choice in the UK, Regional Studies. This paper presents empirical evidence of regional variations in mortgage choice decisions within the UK's mortgage sector. Utilizing British Household Panel Survey (BHPS) data for the years 2001, 2007 and 2008, the paper suggests that a household's decision to choose a variable rate mortgage is more likely to occur in areas with lower incomes and affordability rates, such as Northern England, Scotland and Wales. Since variable rate mortgages are more sensitive to income and monetary policy shocks, the disproportional distribution of variable contracts within the mortgage sector may have a differential impact on the regions.

Government Policy and the Fixed-Rate Mortgage

A central argument in the ongoing discussion about the fates of Fannie Mae and Freddie Mac is the importance of the 30-year, fixed-rate, prepayable mortgage (FRM). The FRM has been held up as the gold standard in mortgage instrument design and as an essential element of the U.S. housing-finance system. Supporters of Fannie Mae and Freddie Mac argue that a government guarantee eliminating credit risk is essential to ensuring the FRM remains the main instrument for housing finance. The FRM has benefits for the consumer through payment stability and the right to prepay the mortgage without penalty. But these benefits come at significant cost. The interest rate and prepayment risk in the FRM are costly and difficult for investors to manage. There is a premium for both the long term and the prepayment options that are paid by all users of the mortgage. The FRM causes instability in the mortgage market through periodic refinancing waves. The FRM can create negative equity in an environment of falling house prices. And the taxpayers are on the hook for hundreds of billions of dollars in losses backing the credit risk guarantees provided by Fannie Mae and Freddie Mac to support securities backed by the FRM. International experience suggests that mortgage markets work fine without an FRM (only Denmark has an equivalent instrument). Borrowers rarely stay with the same mortgage for 15–30 years. Shorter-term fixed-rate mortgages would be less expensive than the FRM in most interest rate environments, particularly if lenders were allowed to charge prepayment penalties. The taxpayer is exposed to too much risk in supporting Fannie Mae and Freddie Mac to justify continued government support for a product for which the costs outweigh the benefits.

Mortgage Contract Choice in Subprime Mortgage Markets

The boom in the subprime mortgage market yielded many loans with high LTV ratios. From a large proprietary database on subprime mortgages, we find that choice of mortgage rate type is not linear in loan sizes. A fixed rate mortgage contract is a popular choice when loan size, measured by LTV ratio, is small. As LTV ratio increases, borrowers become more likely to choose adjustable rate mortgage contracts. However, when LTV reaches a certain level, borrowers start to switch back to fixed rate contracts. For these high LTV loans, fixed rate mortgages dominate borrowers' choices. We present a very simple model that explains this nonlinear pattern in mortgage instrument choice. The model shows that the choice of mortgage rate type depends on two opposing effects: a effect and an rate effect. When the loan size is small, the term structure effect dominates: rising LTV ratios making ARM loans less costly, and more attractive. However, when the loan size is large enough, the interest volatility effect dominates: rising LTV ratios making FRM loans less costly and preferable. We present strong empirical evidence in support of the model predictions.

Eurohypothec: Drafting a Common Mortgage for Europe

The virtual lack of cross-border mortgage lending in the European Union (E.U.), even before the current mortgage and financial crisis, reveals the need to adopt a pan-European mortgage instrument. This article shows how it can be structured such that a common mortgage instrument for Europe could lead to the construction of a true pan-European cross-border mortgage market. It is the so-called Eurohypothec. The model is studied following the objectives pursued by the E.U. White Paper about the integration of the E.U. mortgage credit markets and also taking into account the causes of the current mortgage and financial crisis (mainly weak legal structures of mortgage securitization processes and their control, in addition to the lack of transparency in mortgage lending). The paper also shows how operations using or based on mortgage loans can be done efficiently, securely, and transparently throughout Europe through the so-called Eurotrust. In conclusion, the writer finds out that the combination of Eurohypot...

Mortgage Contract Choice in Subprime Mortgage Markets

The boom in the subprime mortgage market yielded many loans with high LTV ratios. From a large proprietary database on subprime mortgages, we find that choice of mortgage rate type is not linear in loan sizes. A fixed rate mortgage contract is a popular choice when loan size, measured by LTV ratio, is small. As LTV ratio increases, borrowers become more likely to choose adjustable rate mortgage contracts. However, when LTV reaches a certain level, borrowers start to switch back to fixed rate contracts. For these high LTV loans, fixed rate mortgages dominate borrowers' choices. We present a very simple model that explains this 'nonlinear' pattern in mortgage instrument choice. The model shows that the choice of mortgage rate type depends on two opposing effects: a 'term structure' effect and an 'interest rate volatility' effect. When the loan size is small, the term structure effect dominates: rising LTV ratios making ARM loans less costly, and more attractive. However, when the loan size is large enough, the interest volatility effect dominates: rising LTV ratios making FRM loans less costly and preferable. We present strong empirical evidence in support of the model predictions.

Testing a theoretical model of mortgage demand on UK data

Mortgage demand is a poorly understood and under-researched aspect of the financial behaviour of households. This paper tests empirically the basic results of Brueckner's model of mortgage demand on UK mortgage market data. The choice of mortgage instrument is used to identify impatient debt maximizers and patient borrowers who borrow at intermediate levels. Thus the research confirms the conditions under which households will use the largest possible mortgage and the circumstances under which savings are invested in the property. A unique contribution of the work is the estimation of mortgage demand equations corrected for endogenous housing demand, for a single housing finance system, where borrowers face different opportunity costs of equity in their owner occupied property, allowing a purer test of the theoretical model.

Regressive Interest Rate Expectations and Mortgage Instrument Choice in the United Kingdom Housing Market

The paper considers the choice of mortgage instrument when the rate of interest is fixed for a short duration, with reversion to a variable (bullet) rate mortgage contract. The research is the first direct test for regressive interest rate expectations using United Kingdom data while testing for wealth and portfolio effects. The econometric modeling uses a variety of nonparametric and parametric techniques to control for classification error in the dependent variable. There is evidence that households adopt regressive interest rate expectations. The lack of statistical significance of wealth and portfolio effects confirms the short run cash flow perspective of United Kingdom mortgage choices.

Choice of mortgage instrument, liquidity constraints and the demand for housing debt in the UK

The research uses microdata to estimate reduced form mortgage demand equations based on truncated regressions, dissagregated by choice of mortgage instrument. The choice is between a standard annuity mortgage and a balloon type mortgage (the endowment). The estimates are used to indicate the differential impact of credit market rationing and financial liberalization on households. The results indicate significant variations in mortgage demand by choice of mortgage instrument. Econometric testing demonstrates that the choice between an endowment and a repayment mortgage can be used as an exogenous indicator of liquidity and portfolio positions and different user costs of owner occupation.

Consumer trade‐offs among mortgage instrument variables

With the development of increasingly complex mortgage instruments, the process by which consumers choose among these instruments also increases in importance. The real estate literature does not address how consumers of mortgage instruments make tradeoffs among the different instruments. The study controlled for interest rates, and looked at five variables: number of points, additional fees, reputation of lender, type of mortgage (FRM vs. ARM), and term in years of mortgage. Using conjoint analysis it is found that consumers do indeed have different preferences for different mixes of mortgage instruments. It is suggested that mortgage instruments can be tailored to different market segments of borrowers.

Mortgage design in the 1990s: theoretical and empirical issues

Examines recent innovations in the UK mortgage market and links these to the theoretical and empirical literature on the choice of mortgage instrument by households. Low inflation rates and employment insecurity have led to a demand for more flexible payment and amortization scheduling. Estimates a multivariate logit and a probit model to highlight the underlying determinants of amortization rates (mortgage maturity) from 1987 to 1991. Sees affordability criteria and the susceptibility of a household to financial problems as important determinants of extended mortgage maturities while the absence of these problems encourages shorter maturities, consistent with lifecycle behaviour. These choices provide the underpinnings to subsequent mortgage market innovations.

Real estate market institutions in the United Kingdom: Implications for the United States

Abstract The characteristics of the recently stressed U.K. housing and real estate markets are compared with market behavior and performance in the United States. Four distinguishing characteristics are examined: the mortgage instrument, long‐term price declines, asset derivatives, and a privatized secondary market. In the United Kingdom, lenders shift interest rate risk to borrowers since the market for selling this risk is limited. The market is circumscribed by the inherent characteristics of the prevailing endowment mortgage and the absence of implicit government guarantees for default risk. To improve liquidity, the United Kingdom has attempted to develop derivative markets for house equity. It has also created a secondary market by privatizing mortgage‐backed security guarantees. Both nascent markets have policy implications for house and mortgage credit risk in the United States.

The Demand for Home Mortgage Debt

Households face complicated financial choices with respect to housing, one of which is the choice of type of mortgage, if any, to use when purchasing a property. This is rendered all the more complex by the great variety of mortgage contracts (mortgage instruments available). Yet mortgage choices also involve the decision on how fast to repay, whether to pay off the debt early, refinance, or even default on the loan. This article looks at those approaches to the analysis of mortgage choice based upon the rational utility maximising framework of economics. Mortgage demand, or the size of debt, is also central or related to these decisions. Brueckner (1994) has made a significant contribution to the analysis of mortgage demand under certainty and uncertainty and these models are often used to guide empirical analysis. There is also much formal modelling of the choice of mortgage instrument, including the risky context of this choice involving variable house prices, interest rates, and incomes. The analysis of prepayment and default decisions (assuming that they are voluntary choices) has been important for the valuation of securitised mortgage debt, but also for understanding household behaviour. The key theme of this article is that all of these decisions, with their sophisticated theoretical and econometric models, are very much interrelated. Imperfect capital markets and imbalances of information underpin this interdependence. Though other approaches to decision making, both psychological and sociological, are important, the classical approach can still offer great insight into the logic of this critical set of financial choices.

Adjustable rate mortgages and housing demand: The impact of initial rate discounts

This article investigates the impact of ARM initial rate (teaser) discounts on mortgage choice and housing demand. Because discounted ARM loans may reduce expected user costs, theoretical models predict a positive impact on housing expenditures. To test the hypothesis, a simultaneous model of housing expenditures conditioned upon mortgage instrument choice is estimated using a national sample of transactions for the 1986 to 1988 period. The results indicate that overall housing demand would have been reduced by approximately 13 percent during the period in the absence of ARM loans.