52 International Comparison of Mortgage Product Oerings
© Research Institute for Housing America September 2010. All rights reserved.
13. Scanlon et. al [2009] report that the use of interest-only mortgages has fallen in several countries,
including Ireland and the Netherlands, as both borrowers and lenders gravitate to less risky mortgages.
2005–2006 data from Scanlon et. al. 2009–2010 data from Scanlon 2009, Reserve Bank of Australia,
Council of Mortgage Lenders, Korea Housing Finance Agency.
14. Korea interest is deductible if mortgage term is 10 years or more subject to maximum income limit.
15. In Germany, the lender can immediately cancel the loan if the borrower goes into negative equity, even if
the borrower’s payments are up to date, although the facility is little used in practice.
16. Interest-only mortgages in the Netherlands have a maximum 75 percent LTV. Amortizing mortgages
can be as high as 100 percent LTV where value is defined as “foreclosure value,” the likely proceeds from a
foreclosure sale.
17. Another quirk that favored endowments over repayment mortgages was the fact that U.K. lenders
charged interest on an annual basis. Thus the borrower with an amortizing loan did not get benefit of the
principal reduction during the year, raising the effective interest rate. Life insurance premiums could be
invested during the year, effectively lowering the amount of premiums necessary to repay the loan relative to
the interest-only repayment loan. This practice was phased out in the 1990s.
18. For example on the Nationwide Building Society website a payment holiday of between three and twelve
months can be taken if the mortgage for more than one year old and is less than 80% of the value of the
home at the end of the payment holiday. The borrow back feature allows a drawdown of past overpayments
subject to the LTV constraint.
19. The U.K. Homeowners Mortgage Support Program assists with mortgage payments for unemployed
borrowers for up to two years, which may contribute to lower foreclosures. As in the U.S., lenders have been
slow in repossessing houses — in part because house prices began rising at the end of 2009.
20. Subprime ARMS, balloons and interest-only mortgages have significantly higher default rates than prime
fixed rates [Chomsisengphet and Pennington-Cross 2008]. However when controlling for other factors such
as LTV, FICO score and geographic area, mortgage product variables appear less important. Demyanyk and
Van Hemert [2008] find that ARM and hybrid loan variables were insignificant in explaining the probability
of default. Loan margin and a pre-payment penalty were significant but had small effect.
21. There tends to less product variety in most countries as compared to the U.S. Thus there are no statistics
relating product characteristics to default. Rather the focus is on underwriting variables such as LTV, adverse
credit and low documentation.
22. Australian estimate from Genworth July 2010. Canadian estimate from CMHC and based on average loan
size from Canequity.com.
23. Covered bonds are corporate obligations of the lender. Investors have priority rights to the pool of
mortgages (“the cover” pledged to the bondholders). For detail on covered bond requirements see ECBC
[2009].
24. Among the subject countries only Canada and Japan have government-supported secondary market
institutions. The Canada Mortgage and Housing Corporation and Japan Housing Finance Agency play a
similar role to Ginnie Mae in the U.S. See Lea [2010] for a more in-depth discussion.
25. Koijen et. al. [2009] find that the long-term bond risk premium is a more powerful determinant of
mortgage choice than the simple spread.
26. Effective margins are less due to the widespread use of initial period discounts or “teaser rates.”
27. Most recently in the European Commission White Paper [2008]. The European Mortgage Federation
response [2008] recommends keeping the right of early repayment as a contractual option. They note
“As a general rule, individual consumers should bear the consequences of the choice they make, i.e.
borrowers not choosing an option to repay early should not pay for the costs of this option on an individual
basis. The EMF considers that a cross-subsidisation!/!mutualisation model, under which all customers