Over-dependence on 30-year mortgages has drawbacks

When Americans are moving to a new home, they are overwhelmingly doing so with a 30-year fixed-rate mortgage. That reliance on long-term mortgages trumps any other country in the world and could have significant drawbacks, said a new study.

Commissioned by the Mortgage Bankers Association, researchers at San Diego State University found that 95 percent of all U.S. mortgages in 2009 were long-term fixed-rate home loans. Comparatively, just 1 percent of all mortgages in Spain fell into that category, 10 percent in Canada and 22 percent in Japan. As a result, there was an increasing chance in the U.S. that borrowers were being matched up with mortgage products that they might not be able to afford.

"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 Michael Lea, the lead author of 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."

Lea added that by relying less on fixed-rate mortgage to finance borrowers' relocations to new homes, other countries may have better mechanisms in place to deter lender loss. In the U.S., banks can expect to lose another $286 billion from bad mortgages before the end of 2011, said Moody's.
 

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