Mortgage Finance around the World

As the debate on the future of Fannie Mae and Freddie Mac heats up, a useful exercise is to ask how does the U.S. system of mortgage finance compare to other countries, with the obvious caveat that there are a lot of differences to account for. 

A good place to start is a recent working paper by Michael Lea at San Diego State University.  The first observation from Dr. Lea’s paper is that several countries, with far less government involvement in the mortgage market, have comparable, if not higher, homeownership rates than the United States.  These countries include Australia, Ireland, Spain, the United Kingdom and Canada.  He also found that countries with less government support of their rental markets also have higher ownership — not surprising since higher rental subsidies would discourage ownership.

Other differences:  the United States and Denmark are the only developed countries where the predominate type of mortgage is a long-term, fixed rate.  Most countries have variable rate or fixed rate for shorter periods. For instance in Germany, many mortgages offer a fixed term for 10 years, then either adjust or roll-over. 

The United States is also almost alone in having no prepayment penalties and no recourse.  Where a mortgage is recourse, the lender is not limited to collecting just on the house but can go after a borrowers’ income or other assets.  So apparently, in the rest of the World, a borrower is expected to pay his mortgage regardless of the value of his house.

In most other countries, even those with comparable homeownership rates, most funding for mortgages is via bank deposits.  That is surprising given how often I’ve heard it claimed that you can’t rely on just deposits to fund the mortgage system. Somehow the rest of the world manages to do so.

That’s just a few of the interesting comparisons in Lea’s paper.  It is an easy read and has some great charts and tables.