May

4

Mortgage comfort

May 4, 2008 | 1 Comment | Joshua Gans

While I may lament the lack of long-term government backed institutions to maintain financial stability, there are some areas where we are ahead of the game. Ian Ayres and Barry Nalebuff writing in Forbes propose two ‘innovations’ that could help matters in mortgage markets there. First, they propose adjustable interest rate mortgages that vary the term of the loan rather than repayment rates when interest rates change. Second, they advocate shared equity mortgages.

For Australia, the good news is that we have both of these things. Most mortgages have change with interest rates and adjust the term. Moreover, in recent times, as mentioned in the article, we have equity financed mortgages (provided by Rismark; a company I have had an association with). In the US, Ayres and Nalebuff recognise the market could provide this but governments could give them a kick along. Australia is their proof of concept.

[Update: Alan Blinder pushes for a revamp of the US institutions regulating mortgages.]


Comments

One Response to “Mortgage comfort”

  1. Kevin Cox on May 5th, 2008 8:45 am

    At the level of the fundamental transaction a mortgage is the creation of money that represents a promise to repay. If you cannot repay the money then you forfeit the asset. The technical difficulty arises whn the promise to repay (the money) gets separated from the asset. That is the fungibility of money and the way we have organised our monetary system means that the asset values that back the money become disassociated from the money. This works well when the system does not get corrupted by more money being created than there are assets backing them. Unfortunately the organisations that create money namely governments and banks have a systematic bias to allow this to happen. Governments so they collect more taxes and pay less out because of inflation. Banks because they persuade people to take out loans against other assets (your future wages) than against say houses. Both these inbuilt biases in the way the system operates means that it is inevitable that we will have inflation at some level and indeed it is now institutionalised. It also means that we will inevitably get asset bubble inflation because it is in the interests of those who create loans to get rid of the risk associated with the loss of value of the asset against which the loan was created.