A Comparison of International Housing Finance Systems

Strategic Insights -

The United States has been examining its housing finance system amidst the housing market turmoil. A Senate committee hearing featuring experts from academia and policy organizations shed light on international comparisons and potential reforms for the US system. The discussion centered on mortgage interest rates, prepayment penalties, and the mortgage interest deduction.

Key Takeaways:

  • The US mortgage interest deduction is not seen as a primary driver of homeownership, with experts suggesting that it disproportionately benefits high-income households.
  • The deduction's removal could have adverse effects on housing prices, particularly in a fragile market like the current one.
  • Prepayment penalties are common in international housing finance systems, with countries like Canada and the Netherlands typically capping their duration at 5 years.
  • Experts agree that a market for loans with and without prepayment penalties exists, allowing borrowers to self-select based on pricing and expectations.
  • The lack of prepayment penalties in the US has resulted in high transactions costs for refinancings, which could be reduced through instruments that lower these costs.

Statistics:

  • 49% of American households do not pay taxes, making the mortgage interest deduction less relevant for lower-income and middle-income households.
  • In the US, the maximum loan cap for deducting interest is $1 million, with experts suggesting that lowering this cap could help shrink the absolute size of the deduction over time.
  • The World Bank has noted that high transactions fees for refinancings in the US, which function as a form of prepayment penalty, contribute to consumer costs.

Sources:

  • Michael Lea, Director, The Corky McMillin Center for Real Estate, San Diego State University
  • Susan M. Wachter, Worley Professor of Financial Management, Professor of Real Estate, Finance and City and Regional Planning, The Wharton School, University of Pennsylvania
  • Alex Pollock, Resident Fellow, American Enterprise Institute (AEI)

Note: All sources cited are from the original testimony provided during the hearing.