U.S.Mortgage System Is Unmatched by Rest of the World

It may come as a surprise to learn that America's homeownership rate is not nearly as high as in some other countries. Although our citizens are regarded as the "best housed" in the world, the percentage of folks owning their residences is greater in Norway, Iceland and Ireland, just to name a few.
The term "best housed" refers not to numbers or percentages but to the quality of our dwellings. The United States also has a mortgage system that is second to none. Indeed, our system of mostly fixed-rate loans funded at extremely low rates is widely envied but rarely emulated.
The main difference is that the primary U.S. mortgage market is backed by a sophisticated, well-developed secondary market in which investors throughout the globe keep our local lenders awash with cash.
They do that through largely secondary-market intermediaries like Fannie Mae and Freddie Mac, two government-sponsored enterprises that were chartered by Congress to make sure lenders always have money to lend, even during periods of high interest rates and private conduits that perform the same function.
In recent years, totally private companies have started taking over a larger share of the secondary market, as Fannie and Freddie work through their financial and regulatory difficulites.
These mortgage-market middlemen purchase loans from lenders, package them into securities and sell them to investors. And in so doing, they are able to meet the needs of participants at both ends of the home-loan transaction.
American home buyers often complain about the complicated and lengthy lending process. But most of their counterparts in other countries would love to have a system that works as smoothly as ours - and is as borrower friendly.
Here's a look how the others stack up:

• Canada: Mortgages in our neighbor to the north rarely have rates that are fixed for more than five years. And they almost always come with "yield maintenance penalties" that guarantee lenders a minimum return over the fixed-rate period. When the loans roll over - that is, when the period of fixed rates expires - borrowers select another fixed-rate term ranging from one to five years at the then-current mortgage rate. For the most part, banks and credit unions hold mortgages in Canada as opposed to being sold on the secondary market, which explains why they tend to favor the lender rather than the borrower.
• Great Britain: Variable-rate mortgages dominate here. These are the English version of our adjustable-rate mortgages. But unlike our ARM's, which usually come with annual and life-of-loan caps that protect borrowers against uncontrolled spikes in their monthly payments, those in England are held in check solely by the competition. When market rates change, lenders in the United Kingdom review what their borrowers are currently paying and decide at their own discretion whether or not to raise or lower the rate. But if lenders adjust too much (or more than their competitors), borrowers take their business elsewhere. A number of countries allow buyers to borrow the full value of the property, but the United Kingdom is a rarity in that it permits borrowing up to 110 percent of the value.
• Japan: The Japanese mortgage market has grown rapidly in the past 30 years, according to a report in The Journal of Economic Perspectives. "In fact," states the article by Richard Green, a professor of real-estate finance at George Washington University, and Susan Wachter, a professor of financial management at the University of Pennsylvania's Wharton School, "Japan's mortgage market has evolved in a way that resembles the evolution of the U.S. mortgage market, although with a lag." As a result, bank lending still dominates, and banks offer mostly adjustable rate mortgages or short-term (typically three-year) fixed-rate loans. Also, down payments average 50 to 60 percent.
• Germany: Borrowers have limited options in Germany. Buyers usually put down at least 40 percent. If they want to borrow more than 60 percent, they can take out a second mortgage for up to an additional 20 percent of value. The rates charged on first mortgages are only slightly higher than rates on government bonds with a similar maturity. But if the loans are paid off early, they are required to pay the lender all the interest they would have paid had the loan amortized through to maturity.
• Denmark: Denmark's mortgage system, like ours, relies heavily on the capital markets. Consequenlty, it is the only country to have home loans with most of the key features of those found in the Unites States. But there are limitations. For one thing, lending criteria is extremely rigid, much more so than in the States. For another, Danish borrowers must come up with far larger down payments. In the United States, borrowers who have a 20 percent down payment tend to get the best terms available. But in Denmark, to achieve an 80 percent loan-to-value ratio, Danes must take out a variable-rate second mortgage to cover the difference. Danish mortgages are pre-payable with penalty, just as they are (for most part) here. But they are also "portable," meaning that when owners sell their homes, they can carry their mortgages over to the new house. In other words, loans with rates that are below the market at the time of the sale need not be paid off.
• France: France has a remarkably small mortgage market for a country with an economy of its size and sophistication. Yet, by world standards, loan terms are considered consumer friendly. More than half the loans there have fixed rates, but the term is typically less than 20 years. Fifteen-year terms are most common. Prepayment penalties are limited by statute, but required down payments are as much as 40 percent.
• Italy: The market here is small, too, but developing. Still, most loans come with variable rates, short terms, prepayment penalties and low loan-to-value ratios. The average down payment is 50 percent; the typical term is 10 to 15 years. Moreover, the process of valuing collateral appraising takes longer than in other countries.
• South Korea: The mortgage system here lags far behind those in other affluent Asian countries, such as Singapore and Taiwan. Loan-to-value ratios, while rising, still remain at 40 percent or less.

Lew Sichelman, United Feature Syndicate, Inc.