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7.1.3 the size of mortgage markets table 7-1 also

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Unformatted text preview: 7.1.3 The Size of Mortgage Markets Table 7-1 also indicates large differences in how much mortgage debt households are taking on, relative to the size of the economy. In Italy and Korea, mortgage debt is below 15% of GDP, whereas in the Netherlands it is 100% of GDP. Updated numbers show that Denmark’s ratio had grown to 95% by 2008, comparable to the Netherlands’ ratio of 99%. The U.K. and Ireland both had mortgage-debt-to-GDP ratios of 80%. For comparison, the U.S. mortgage- debt-to-GDP ratio at the end of 2008 was 92%, twice as high as the EU average (27 countries) of 47%. Some of this size difference is attributable to the fact that countries such as Denmark, Germany, and Italy maintain a minimum 20% down payment requirement (or a maximum 80% loan-to-value ratio; see Table 7-1). Nevertheless, as numbers for Denmark and Netherlands illustrate, the U.S. is no outlier given its much larger government involvement, to which we turn next. 93 7.1.4 The Extent of Government Support, and Home Ownership Rates Clearly, the United States is an outlier in its government involvement in mortgage markets, providing much more support than does any other country. We discuss the various programs to support home ownership in Chapter 9, and of course, there are the GSEs. While many countries have affordable housing programs for low-income households, like the Federal Housing Administration (FHA) in the United States, very few have GSE Godzillas like Freddie Mac and Fannie Mae. Two exceptions are Canada and Japan, but the market share of government-backed institutions is significantly less than that of the U.S., and the securitization market is substantially smaller to begin with. In particular, since 1945, the Canada Mortgage and Housing Corporation has insured the principal and interest on around $135 billion of first residential mortgage loans, a far cry from what Fannie and Freddie have guaranteed. And in Japan, the Government Housing Loan Corporation directly lent to households, but has been replaced by the Japan Housing Finance Agency to focus on securitization instead. Importantly, unlike the experience in the United States, none of the GSEs of other countries have experienced exceptional losses or required government capital injections. The reason is that none of these institutions takes on significant credit and interest rate risk, as they have limited or no investment portfolios, and none has a formal affordable housing policy mandate (like Fannie and Freddie’s mission goals). Ultimately, the U.S. government’s being hand-in-glove with the GSEs, rather than at arm’s length, has allowed these institutions to grow to a size and complexity where the financial markets perceive them to be guaranteed fully for all practical purposes. This has lowered the GSEs’ cost of borrowing and allowed them to grow even further. Hence, in spite of experiencing similar housing price collapses to that of the U.S., no other country faces the uphill task of overhauling mortgage finance and reconsidering the...
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7.1.3 The Size of Mortgage Markets Table 7-1 also indicates...

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