General background

The Complete Debt Relief Manual

How to Start Living a Debt Free Life

Get Instant Access

For those countries with large and extensive mortgage markets, such as the United States (US) and the United Kingdom (UK), mortgage finance can be the single most important source of personal borrowing, dominating the balance sheets of many households. Thus the size, extent and the contractual features of mortgage finance are bound to have important implications for the national economic performance of many countries, along with individual and social welfare. Given the benefits of owner occupation, access to mortgage credit can significantly effect life chances, for example equity can be withdrawn to finance education and owners have access to an asset which materially effects wealth (Stephens 2000). Equity extraction can also be used to finance the purchase of business or other assets (Disney et al. 2002; Jones 1993, 1994, 1995) complicating the link between mortgage and housing demand.

Governments in developing economies have begun to recognise the importance of a mortgage market for channelling funds into the housing sector. Mortgage loans can expand housing to meet the needs of lower income households, deepening capital markets in such countries. In some cases developing economies have been assisted by the introduction of a secondary mortgage market which has increased liquidity, facilitating further mortgage market development, for example programmes in South Africa and Argentina.1 The study of mortgage markets in developing economies is receiving increasing academic attention (Lea 1994). Alvayay & Schwartz (1997) study the case of Chile, while Lea & Bernstein (1996) demonstrate the importance of mortgage contract design for Mexico. Jaffee & Renaud (1998) consider the advantages of a secondary mortgage market and the conditions required for its development in the transition economies in Eastern Europe. Thus the study of mortgage contracts and mortgage markets is a truly international concern.

The growth of secondary mortgage markets, and their refinement through securitisation where pools of mortgages are packaged for sale to investors who receive interest and capital payments, has been a major spur to research into the mortgage choices of households. For example, both the prepayment of mortgage debt and default on payments have implications for the cash flows accruing to mortgage-backed securities (MBS). These phenomenon then effect the valuation of these financial instruments. The MBS market is now substantial, particularly important in the US, and of growing significance in other countries and Europe. Securitisation can lead to the integration of mortgage markets with other capital markets, reduced interest rates for borrowers, with a reduction in mortgage credit rationing. When mortgage markets are inefficient they place restrictions and implicit taxes on the operation of other capital markets. However, efficient mortgage markets facilitate efficiency in other capital markets, the market for housing and labour markets (Jaffee & Renaud 1995, 1998). Thus household behaviour is more integrated with the broader capital market picture. To gain a thorough understanding of MBS valuation we must consider the mortgage choices of households.

The mortgage choices of households covered in this book include the size of mortgage, the rate of debt repayment (amortisation), choice of mortgage instrument, prepayment of mortgage debt and default. We shall have to consider these choices in the context of both perfect capital markets, and imperfect capital markets with asymmetric information and credit rationing. Chapter 2 will show how the demand for mortgage debt can provide a focus for the study of other mortgage market choices. This current chapter provides some of the important background to understanding household decision making in mortgage markets, presenting the structure of the book.

Actual mortgage choices cannot be entirely divorced from the housing finance systems and broader economies of which they are a part, so we briefly consider some important institutional and policy differences between markets. Given the source of most of the research reported in this book, particular attention will be given to comparisons between the US and the UK, with comparisons of research results for the two economies also presented in the majority of chapters.

A key theme of the book is the importance of mortgage contract design; for example, the potential impact of different mortgage instruments on housing demand, the sharing of risk between borrowers and lenders and the role of contract choice in signalling borrower characteristics. Empirical research in the US has enquired into the impact of the adjustable rate mortgage on the stability of the housing market (Brueckner & Follain 1989; Goodman 1992; Gabriel & Rosenthal 1993). In the UK there has been concern over the prevalence of variable rate debt which effects the sensitivity of economic conditions to changes in short-term interest rates (Maclennan et al. 1998; Chinloy 1995; Britton & Whitley 1997; Munchau 1997). Prescribed loan-to-value ratios are an important feature of mortgage contract design that can impact upon a households' tenure choice and savings behaviour (Slemrod 1982; Hayashi et al. 1988). These are all examples of different mortgage designs having wider economic implications. Why we observe different mortgage contracts and how households choose are important topics for this book. Moreover, the choice set that consumers face can vary significantly between different housing finance systems.

Was this article helpful?

0 0
Debt Free Network Marketing

Debt Free Network Marketing

You and I are aware that cash flow is king in network marketing. Just like any other business, if you don’t have cash in hand, your entire business will come to a grinding HALT! Make no mistake about this because in network marketing, if you don’t have the right mindset and you don’t keep a watchful eye on your cash flow… you will become like the rest of the network marketing failures who run into debt!

Get My Free Ebook


Post a comment