Jump to content
House Price Crash Forum
Sign in to follow this  
Bland Unsight

Amir Sufi: household debt and business cycles

Recommended Posts

Short video with Sufi discussing his research.

The book he wrote in 2014 with his colleague Atif Mian, House of Debt, has been influential in policy circles and reflects the kind of analysis which is responsible for macroprudential measures like the Mortgage Market Review and the PRA's work on buy-to-let credit underwriting (SS13/16).

There are two key differences between US and UK mortgage lending.

Firstly, US mortgage lending is non-recourse; you can drop the keys to the house with the lender and they cannot pursue you for the debt. The same trick won't work in the UK.

Secondly the core mortgage product in the US is a thirty year fixed rate mortgage and floating rate mortgages (what we call trackers and fixed rate mortgages which convert to SVR after an initial two, three or five year fixed period) are far less common. In the US what we call fixed rate (for an initial period) they call adjustable rate mortgage (ARM) reflecting that once the fixed rate period expires the mortgage resets to a floating (adjustable) rate.

WE-AB402_ARMchr_9U_20170328114507.jpg

Source

The "3/1" etc simply describes the length of the initial fixed rate period before the mortgage resets to the adjustable rate so a 3/1 ARM is what we'd call a 3 year fixed rate mortgage resetting to the lenders SVR at the end of the fixed rate period.

In the US a big part of the crisis was home loans which households (and leveraged investors) could service on the initial fixed rate which they could not service on the adjustable rate one the initial fixed term expired and the mortgage reset to a higher adjustable rate. (There had been a treadmill of people refinancing at the end of each fixed rate period but when it all went awry there were no longer cheap refinancing deals to be had.)

For UK borrowers in 2009 mortgages reset from relatively high fixed rates to SVRs, but the SVRs had fallen sharply (with a fair amount of help from the Bank of England)

Image result for mortgage SVR graph 2008

Source

The main bonkers UK mortgage product of the 1997-2008 lending boom was the interest-only mortgage.

Because of the fundamentally different structure of the two mortgage markets things played out very differently in the UK and the US in response to the recession that occurred alongside the 2008 crisis. In the UK, enormous volumes (as in hundreds of billions) of daft interest-only mortgages written before 2008 are still being serviced today (as of the latest figures CML analysis in June 2017 21% of mortgaged owner-occupiers are on interest-only terms), which is probably something like £200bn of mortgages. And then there's about £200bn+ of interest-only buy-to-let.

These mortgages are easy to service at prevailing low mortgage interest rates so these boom mortgages are still with us.

 Residential Interest-only mortgages outstanding

20170515-news-views-chart-1-residential-

Source

Share this post


Link to post
Share on other sites

Join the conversation

You can post now and register later. If you have an account, sign in now to post with your account.

Guest
Reply to this topic...

×   Pasted as rich text.   Paste as plain text instead

  Only 75 emoji are allowed.

×   Your link has been automatically embedded.   Display as a link instead

×   Your previous content has been restored.   Clear editor

×   You cannot paste images directly. Upload or insert images from URL.

Loading...
Sign in to follow this  

  • Recently Browsing   0 members

    No registered users viewing this page.

  • 407 Brexit, House prices and Summer 2020

    1. 1. Including the effects Brexit, where do you think average UK house prices will be relative to now in June 2020?


      • down 5% +
      • down 2.5%
      • Even
      • up 2.5%
      • up 5%



×
×
  • Create New...

Important Information

We have placed cookies on your device to help make this website better. You can adjust your cookie settings, otherwise we'll assume you're okay to continue.