Longer-term fixes in the US are possible through a different mortgage funding model to the UK, where home loans are propped up by current accounts and short-term fixed rate deposits.
Christian Hilber, a university professor at the London School of Economics, said: “In the US, they sell their mortgages to Fannie Mae and Freddie Mac [firms which guarantee most of America’s mortgages]. They then bundle these mortgages and sell the risk to investors. This allows them to spread the risk.”
The system has its flaws, of course. During the 2007 financial crisis, the subprime market collapsed and lending froze. This was exacerbated by lax regulation, much like in the UK, which had allowed lenders to issue mortgages based on shaky affordability.
But Professor Hilber said it does enable US borrowers to lock in fixed interest rates for a very long time. The professor added: “The UK market is diametrically different, with the typical mortgage being a two-year fixed – a teaser rate – before you roll on to a variable one.
“This means that in the UK, many more borrowers are exposed much more to interest rate risks. So, many more lower and middle income households will face difficulties paying their mortgages, and will experience hardship as a consequence.
“It is an additional consideration the Bank of England needs to take into account, making combating inflation even harder.”
They’ve missed that that different modeal meant both Fannie and Freddie going resoundingly bust.
It’s also not true that floating rates make dealing with inflation more difficult. It makes it easier. More people are exposed to changed interest rates more quickly. Therefore addressing inflation by changing interst rates is easier.
Exactly – talk about not learning the lessons of the past.
ALSO it must always be remembered that the whole sub-prime fiasco can be laid at the door of Clinton, who coerced the banks into lending to the bad risks and that fool Bush who did nothing to stop it.
If addressing inflation with interest rate hikes is easier in the UK than in the US, then why have our interest rates risen as fast and as high as theirs?
1) We started later
2) We printed – relatively – more money than they did.
The key feature of the standard US fixed-rate thirty year mortgage is that the borrower can renege on it and open a new mortgage loan when interest rates fall but the provider can’t renege on it.
Years ago on the Marginal Revolution blog I commented that that asymmetry doubtless meant that there was a subsidy from the taxpayer though it might be hidden. The commenters – many of them apparently with training in, or at least interest in, Economics – hit the roof. How dare I suggest that the American Dream mortgage borrower was free-loading on the taxpayer?
As Mr Tim implies, Fannie and Freddie going resoundingly bust was a rather fine demonstration of the existence of a taxpayer subsidy.
Separately: I have the impression that Americans still get the tax relief on mortgage interest payments that HMG scrapped long ago. No tax on imputed rent either. Are those subsidies? Angels on pins.
I think the phrase ‘making combating inflation harder’ means that the immediate effects on mortgage holders are bigger and more blindingly obvious in the UK. Hence the greater difficulty the Bank of England faces in getting away with being blamed for the inflation its own policies caused.
So, “harder to combat inflation” – yes, but in the sense the population starts moaning when you’re forced to do so.
Bundling a lot of home loans together and selling them to the secondary market was actually a good idea. It was fucked by the ratings companies giving them undeserved AA status. Doing it properly next time would expose the government to the ire of the bond market, just as they are exposed by gilts.
Wasn’t Northern Rock’s Granite master issuer trust what Christian Hilber is suggesting we should have in the UK? No problem with that was there?
@dearieme
The US has long subsidized home ownership via tax and regulatory incentives. This has been touted by politicians on both sides. This is the source of the term American Dream.
This was endorsed by the powers that be as it is hard to get real property owners to support The Revolution. That appears to be changing now.
Adam Applegarth, were there real, structural problems with Mosaic or just stuff whipped up by Spud and journos? My impression is that most Northern Rock mortgages are on plan to be paid off.