Excellent post. I'm an American and I still have no idea why our bathrooms are so bad - fancy restaurants, Park Ave companies, doesn't matter. A sociology PhD thesis lurks there I think. My understanding is that the government's role in the mortgage market also played an important role is reinforcing racial wealth inequality, so in that sense I don't see the government's role as being as surprising as it seems on the surface. The country was built on a series of bargains between the north's commercial interests and the south's social goals and promoting mortgages for whites while excluding blacks served both interests.
Mark, I just discovered your writing on financial issues (courtsey SVB fiasco) and am very glad I did. Your writing is very informative and thought provoking. I know the focus of this article may have been just the financial risks and implications of 30-year mortgages. I would love to see if you have any analysis on economic impact of homeownership that comes from such mortgages. Or do you see it as materially the same whether a population owns or rents?
Thank you for this excellent post. In the Netherlands it is also possible to take out a mortgage with a 30 year fixed interest rate even with a government guarantee, so you pay less interest on your mortgage.
Hi Mark, Very much enjoying the weekly newsletter - the variety of topics and the historical analysis make it essential reading for me every week. One quick question if I may - you quote former Bank of England Governor Mervyn King “You Americans are so strange. Most countries have socialised healthcare and a private market in mortgages. You have socialised mortgages and a private market in healthcare.” Do you have a reference source for that quote - keen to see the underlying remarks if possible. In the article itself it links to something unrelated? Look forward to future editions. Pete
Mark you noted in passing that Denmark is the only other country that offers a comparable form of mortgage financing. That is broadly true but I think the Danish mortgage financing system has some distinct and intriguing features of its own. The New York Fed published a paper in 2018 that compared the US and Danish mortgage systems. Worth reading if you have not seen it. Paper titled “Peas in a Pod? Comparing the U.S. and Danish Mortgage Finance Systems”
great post, although I would argue that the 30-yr fixed mortgage is not so bad for banks and the current mortgage market structure in countries like the UK is absurdly unfair to the consumer.
From a bank perspective, the interest risk can be hedged easily. Pricing for a fixed 30yr mortgage will reflect the IRS curve. The prepayment risk is also taken into account and usually priced in. Credit risk usually peaks around year 5-7, after that it declines steeply. I would argue that the problems you are highlighting are more a function of poor credit risk management than a structural weakness of the 30yr fixed mortage. By the way, Italy has 30yr fixed mortgages as well!
In the UK, the current market structure makes no sense. The need to refinance every 2 or 5 years is the main reason why we need to waste money in propping up the housing market. You can't afford a declining market else your LTV will explode, complicating the refinancing process. However, this prices out people who are on the property ladder already. The lack of any long-term fixed products in the UK creates structural weakness in the UK housing market and ultimately the economy. Great for the banks - can collect fees every two/five years, minimal prepayment risk - terrible for everyone else.
But this is a finance blog, so I can understand your point of view ;)
Hi Thomas, Thanks for this. I guess like everything else, there are no perfect solutions, just trade-offs. And I agree, institutions are better placed to manage interest rate risk than consumers. Although some friction in the process would perhaps be a constraint on ever rising house price inflation. Do find it amusing though that among the trade-offs, the US of all countries has chosen nationalisation, yet people seem OK with that because it's structured in a more indirect way.
Excellent post. I'm an American and I still have no idea why our bathrooms are so bad - fancy restaurants, Park Ave companies, doesn't matter. A sociology PhD thesis lurks there I think. My understanding is that the government's role in the mortgage market also played an important role is reinforcing racial wealth inequality, so in that sense I don't see the government's role as being as surprising as it seems on the surface. The country was built on a series of bargains between the north's commercial interests and the south's social goals and promoting mortgages for whites while excluding blacks served both interests.
That's very interesting, thanks, Kevin.
1930’s and all the other instances
should be 1930s
Brought to You by the Committee to Save the Apostrophe from Abuse
I'm normally a stickler for such things, but you've got me on this one!
Mark, I just discovered your writing on financial issues (courtsey SVB fiasco) and am very glad I did. Your writing is very informative and thought provoking. I know the focus of this article may have been just the financial risks and implications of 30-year mortgages. I would love to see if you have any analysis on economic impact of homeownership that comes from such mortgages. Or do you see it as materially the same whether a population owns or rents?
I looked at something like that in context of UK here - https://www.netinterest.co/p/generation-rent. Doesn't quite address your question, but touches on the theme.
The interest rate is quite good as compare to others .
Thank you for this excellent post. In the Netherlands it is also possible to take out a mortgage with a 30 year fixed interest rate even with a government guarantee, so you pay less interest on your mortgage.
Hi Mark, Very much enjoying the weekly newsletter - the variety of topics and the historical analysis make it essential reading for me every week. One quick question if I may - you quote former Bank of England Governor Mervyn King “You Americans are so strange. Most countries have socialised healthcare and a private market in mortgages. You have socialised mortgages and a private market in healthcare.” Do you have a reference source for that quote - keen to see the underlying remarks if possible. In the article itself it links to something unrelated? Look forward to future editions. Pete
Hi Pete, it’s in the podcast linked, at 6’58”
Thanks Marc for letting me know. Enjoy your weekend.
Mark you noted in passing that Denmark is the only other country that offers a comparable form of mortgage financing. That is broadly true but I think the Danish mortgage financing system has some distinct and intriguing features of its own. The New York Fed published a paper in 2018 that compared the US and Danish mortgage systems. Worth reading if you have not seen it. Paper titled “Peas in a Pod? Comparing the U.S. and Danish Mortgage Finance Systems”
Thanks, Tony; hadn't seen that, will take a look.
Hi Marc,
great post, although I would argue that the 30-yr fixed mortgage is not so bad for banks and the current mortgage market structure in countries like the UK is absurdly unfair to the consumer.
From a bank perspective, the interest risk can be hedged easily. Pricing for a fixed 30yr mortgage will reflect the IRS curve. The prepayment risk is also taken into account and usually priced in. Credit risk usually peaks around year 5-7, after that it declines steeply. I would argue that the problems you are highlighting are more a function of poor credit risk management than a structural weakness of the 30yr fixed mortage. By the way, Italy has 30yr fixed mortgages as well!
In the UK, the current market structure makes no sense. The need to refinance every 2 or 5 years is the main reason why we need to waste money in propping up the housing market. You can't afford a declining market else your LTV will explode, complicating the refinancing process. However, this prices out people who are on the property ladder already. The lack of any long-term fixed products in the UK creates structural weakness in the UK housing market and ultimately the economy. Great for the banks - can collect fees every two/five years, minimal prepayment risk - terrible for everyone else.
But this is a finance blog, so I can understand your point of view ;)
Hi Thomas, Thanks for this. I guess like everything else, there are no perfect solutions, just trade-offs. And I agree, institutions are better placed to manage interest rate risk than consumers. Although some friction in the process would perhaps be a constraint on ever rising house price inflation. Do find it amusing though that among the trade-offs, the US of all countries has chosen nationalisation, yet people seem OK with that because it's structured in a more indirect way.
If U.S mortgage is nationalized as you say, then it should be a good investment. No?
At a high-level, how do mortgages work in other countries like the UK? Not a 30-year fixed rate?
Typically either floating rate, Ryan, or when they are fixed, borrower would need to pay a prepayment penalty to get a new rate.