You're Luckier than You Know: American Mortgages Viewed from Afar

There are plenty of things not to like about the U.S. mortgage market. There's less competition among lenders than there once was, as the credit crunch pushed many over the edge. Some lenders (think "robosigning") don't always act with as much integrity they might. And plenty of economists and politicians object to the government's role in propping up the system.

But, as someone who's lived overseas, mostly in Europe, for decades, I'm here to tell you that American mortgages look pretty good from a distance of a few thousand miles -- at least from a consumer's point of view. That's because home loans in the U.S. have two features that are exceedingly rare in almost all other first-world countries:

  1. You can get 30-year fixed mortgage rates, which means you can be certain that your first and last monthly payments (and all the others in between) are going to be exactly the same.
  2. You can generally refinance without paying a penalty.

In 2010, Dr. Michael Lea of San Diego State University wrote a paper comparing mortgage offerings around the world. He concluded: "Denmark is the only country in the world other than the US in which the dominant product is the long-term FRM that can be prepaid without penalty."

Fixed Mortgage Rates a Boon for Borrowers

Few homeowners would be happy to lose either of those, but it's the first that we tend to value most. Imagine a world in which you enter a binding contract for 30 years without having any idea of the financial commitment you were making. 

Maybe you sign at 3.54 percent, which Freddie Mac's archive says was the average for 30-year fixed-rate mortgages (FRMs) in May 2013, but find yourself five years later paying 6.48 percent, which was what it was in August 2008, or 7.16 percent (June 2001) or 11.26 percent (October 1987) or 14.67 percent (July 1984). All those rates were experienced within a single 30-year period, and that's what borrowers in most countries deal with.

And Yet...

Even in Denmark, where long-term FRMs are more common that anywhere except the United States, these make up fewer than half of all home loans, according to Dr. Lea's 2010 figures. In the United States they account for well over 90 percent of the market, while in places like Australia, Ireland, Spain and the UK, they don't exist at all.

You'd think the lack of certainty that's inherent in adjustable-rate mortgages (ARMs) would put borrowers off. But that's far from the case. Indeed, Australia, Ireland, Spain and the UK all have higher homeownership rates than the US.

I get that. When I lived in the UK, I had home loans that were the equivalent of US hybrid ARMs: the rate's fixed for a few years, maybe only two or three, and then it floats with the market. And, because I had no choice, I just had to shrug and sign, hoping that no sudden crisis was going to send rates skyrocketing. But how many Americans, accustomed as they now are to fixed rates, would be willing to accept such uncertainty?

Mortgage Economics 101

The problem for economists and politicians is that the cost of rate fluctuations doesn't miraculously disappear at the US border. And private investors are no more willing to shoulder the risk of today's cheap money becoming more expensive than borrowers are.

That leaves only one other entity, the federal government, to cover that risk. And that's why now, during a time of ultra-low rates, the US government is backing nine out of 10 new mortgages, and the Federal Reserve is buying mortgage-backed securities at a rate of $40 billion a month. As a homeowner, you may not be personally on the hook, but as a taxpayer you most certainly are.

Tough Choices

Although some politicians are actively advocating the wholesale privatization of the mortgage market, it's far from clear how many would ultimately be prepared to pay the electoral cost of such a move, which would inevitably -- at least according to Time magazine and many others -- lead to the disappearance of 30-year FRMs.

And, even if it were possible politically and economically for the U.S. government to disengage, that might not be the end of the matter. In almost every way, the UK mortgage market is in the private sector, but that doesn't stop politicians having to use macroeconomics to prop it up.

Privatization No Panacea

On June 25, outgoing Bank of England Governor Sir Mervyn King warned a House of Commons select committee of a looming problem. Huge numbers of British homeowners in their 30s and 40s face "unsustainable" financial issues if interest rates return to normal levels. It would therefore be necessary, he suggested, for the central bank to keep rates artificially low, even if other conditions made increases desirable.

And the UK's private-sector mortgage market faces other problems. The Times, a London-based newspaper, quotes regulators who estimate that 40 percent of all British mortgages are interest-only, and who expect only half of those to be paid off in full at the end of their terms.&

So privatizing the mortgage market is unlikely in itself to solve all current and future problems for American borrowers or taxpayers -- or eliminate entirely macroeconomic and regulatory roles for the government. Of course, that doesn't mean it won't happen. But, unless and until it does, Americans with home loans can expect to receive envious glances from homeowners in just about every other country.

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