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30-Year Fixed-Rate Mortgage Comes Under Attack

30-year fixed

A new study that compared mortgage products from around the globe found that long-term fixed-rate loans aren’t necessarily the end-all, be-all solution to fix housing.

Per the study, entitled, “International Comparison of Mortgage Product Offerings”, 95 percent of new loans originated in the United States last year were long-term fixed mortgages, compared to just one percent in Spain, two percent in Korea, 10 percent in Canada, 19 percent in the Netherlands, and 22 percent in Japan.

Meanwhile, only five percent were adjustable-rate mortgages, while 92 percent in Australia and Korea were ARMs, along with 91 percent in Ireland, 47 percent in the UK, and 38 percent in Japan.

“By comparing the performance of mortgage products internationally, we see that many countries are experiencing lower default rates than the U.S., despite having a significant share of products such as adjustable rate mortgages and interest only loans,” said Dr. Michael Lea, who conducted the study.

“This indicates the problem with loan design in the U.S. during the crisis was one of a mismatch between borrowers and particular loan designs — not the existence of the loan features themselves. In addition, the lower default rates may reflect stricter enforcement of lender rights as all countries in the survey have recourse lending.”

Lea noted that the wide range of borrowers that exist in the mortgage market require an equally wide range of mortgage program offerings, and argued that a “robust mortgage market” requires a number of different instruments to meet the needs of both borrowers and mortgage lenders.

The survey comes in response to the “Dodd-Frank Bill,” which aims to prohibit prepayment penalties and yield spread premiums, while restricting balloon payments and interest-only periods.

According to the study, these “flexible payment designs” are common in other countries and not associated with higher rates of default.

But there obviously has to be a line, like no more option arms with zero down financing.

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