Database
Table). Mortgage equity withdrawal refers to the
ability of homeowners to borrow against the real
value of their house, i.e. the current value of the
property less accumulated liabilities (e.g., mortgages). The extent to which households can borrow
is therefore directly related to house price developments. The existence of early repayment fees constrains the households’ ability to refinance their
mortgage and benefit, for instance, from a decline in
the market interest rate. The loan-to-value ratio is
the percentage of a house’s value that is financed by
mortgage loans. A high loan-to-value ratio therefore
indicates low self-financing requirements for borrowers while long repayment terms keep debt-service-to-income ratios affordable. The last two institutional features, covered bonds (CB) and mortgagebacked securities (MBS), refer to the level of development of a secondary market through which mortgage lenders can refinance their investment. Both
CBs and MBSs are financial instruments which allow
mortgage lenders to pool and repackage mortgage
loans, and resell them on the capital market.1 The
INSTITUTIONAL FEATURES OF
MORTGAGE MARKETS
ACROSS COUNTRIES
The recent downturn in economic activity around
the world which originated in the US sub-prime
mortgage market crisis has drawn increased attention to the housing markets among academic scholars and policy makers. How are housing markets and
the rest of the economy interlinked? How strong are
the spillovers? What is the role for monetary policy?
The answers to all of these and related questions will
be influenced by the system of housing finance. Thus,
knowledge of the institutional differences in mortgage markets across economies is crucial to better
understand the underlying transmission mechanisms
and to appropriately shape policy responses.
In a recent study, the IMF (2008) has constructed a
composite index summarizing institutional aspects of
the mortgage markets across industrialized countries. The index ranges from 0 to 1 with higher values
indicating easier access to household mortgage
finance. The mortgage market index is constructed as
the simple average of 5 institutional dimensions (see
1 CBs are more common in Europe and especially in Germany,
where they are known as Pfandbriefe. The key difference between
MBSs and CBs is that the issuer of CBs keeps the mortgage loans
on its balance sheets.
Table
National mortgage markets and the mortgage market index
Mortgage
equity
withdrawal
US
Denmark
Netherlands
Australia
Sweden
Norway
UK
Canada
Finland
Spain
Ireland
Japan
Greece
Belgium
Austria
Germany
Italy
France
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Limited
Limited
No
No
No
No
No
No
No
Secondary market
Refinancing
(fee-free
prepayment)
Typical
loan-tovalue ratio
in %
Average
typical
term
(years)
Yes
Yes
Yes
Limited
Yes
No
Limited
No
No
No
No
No
No
No
No
No
No
No
80
80
90
80
80
70
75
75
75
70
70
80
75
83
60
70
50
75
30
30
30
25
25
17
25
25
17
20
20
25
17
20
25
25
15
15
Covered bond
issues (% of
residential loans
outstanding)
na
58.5
0.7
na
10.1
na
0.9
na
2.6
11.1
4.0
na
na
na
2.2
3.6
na
1.6
Mortgagebacked security
issues (% of
residential loans
outstanding)
20.1
0.1
4.6
7.9
0.9
na
6.4
3.6
na
5.7
6.6
4.7
6.2
1.9
na
0.2
4.7
1
Mortgage
market
indexa)
0.98
0.82
0.71
0.69
0.66
0.59
0.58
0.57
0.49
0.40
0.39
0.39
0.35
0.34
0.31
0.28
0.26
0.23
a)
The mortgage market index ranges from 0 and 1 and is constructed as follows: For the variables in columns 1 and 2,
values of 0, 0.5 and 1 are assigned depending on whether equity withdrawals or free prepayments are nonexistent, limited or widespread. For the other four variables each country is assigned a value between 0 and 1, equal to the ratio to
the maximum value across all countries.
Source: IMF (2008) and the references therein. Information refers to the period 2003–06.
CESifo DICE Report 3/2008
70
Database
higher the level of development of these secondary
markets the easier it is for mortgage lenders to
acquire funds for refinancing and in turn to provide
credit to households.
The results of the Table indicate that significant differences remain in the institutional setup of
advanced economies. Among the countries covered,
the US scores highest in the mortgage index (0.98)
whereas France ranks last (0.23). More generally,
Anglo-Saxon countries (US, Australia, UK, Canada)
together with the Scandinavian countries (Denmark,
Sweden and Norway) and the Netherlands provide
the easiest access to home ownership. These countries are typically characterized by the possibility of
equity withdrawal, long repayment periods of up to
30 years, and mortgages are usually endowed with an
option to be prepaid without fees. Furthermore,
banks finance on average 80 percent of the house’s
value and secondary markets are well developed. In
contrast, in continental European countries (France,
Italy, Germany, Austria and Belgium) the access to
housing finance is limited.
Caution is warranted, however, when drawing economic policy implications from the mortgage market
index. While the broad availability of funds for home
financing is in general to be welcomed, the recent
experience of the sub-prime market crisis has
painfully emphasized the downside of easy credit
without appropriate risk monitoring. Equity withdrawal instruments and high loan-to-value ratios can
lead to excessive risk taking of lenders in case of
house price booms. Furthermore, MBSs have come
under criticism especially in the US, since they often
contain complicated portfolios of good and bad
assets which cannot easily be assessed by risk rating
agencies. Thus, quality standards for securities and
risk monitoring – ideally imposed by a supra-national banking regulation system – are needed to ensure
the beneficial role of the mortgage market.
O.R.
Reference
International Monetary Fund (IMF; 2008), World Economic Outlook, Chapter 3, Washington DC.
71
CESifo DICE Report 3/2008