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Significant drawbacks to US dependence on 30-year, fixed mortgage: MBA survey

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The over reliance on 30-year, fixed mortgages in the U.S. during the past year has significant drawbacks and contrasts sharply with the rest of the world, according to a new study sponsored by the Mortgage Bankers Association. Some 95% of new home loans written in America in 2009 were long-term, fixed rate products. This compares to just 1% in Spain, 2% in Korea, 10% in Canada, 19% in the Netherlands and 22% in Japan, said Michael Lea, director of the real estate center at San Diego State University, who lead the study. "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," Lea said. "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 expects lenders in the U.S. to continue writing long-term, fixed-rate mortgages, as rates remain at historical lows and new guidelines under Dodd-Frank and Basel 3 are implemented. "By focusing regulation on loan-product design, borrower choice will be deeply impacted as products that are commonplace in other countries will be considered 'unqualified' for American borrowers," he said. The study also found the U.S. is unusual in banning or restricting prepayment penalties on fixed-rate mortgages. Most countries impose these penalties to compensate lenders for loss, and rates in those countries don't include a significant premium for pre-payments making other financing techniques, such as covered bonds, more common. The cost of pre-payment options in the U.S. "is socialized, with everyone paying a premium in the mortgage rate for the option...this contrasts with the European view that only borrowers who exercise the option for financial advantage should pay the cost," Lea said. Additionally, the study showed the dominance of fixed-rate mortgages and subsequent loan securitization is a byproduct of the government-sponsored entities in the secondary market that "lower the relative price of this type of mortgage." Write to Jason Philyaw.

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