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Key differences between mortgage markets in the USA, Great Britain, Germany and Russia

 
Tags: Law | Mortgage market | Foreclosure | Comparative analysis | Banks | Russia | USA | Great Britain | Germany

Today russian mortgage market can already be matured - it’s settled legislation, the population has figured out the rules of the game and is actively taking a mortgage even in times of crisis. Therefore, often we do not even think that the mortgage market can be arranged somehow differently. In this article, we provide a country comparative analysis - you will be surprised, but mortgage lending in some of them has a completely different structure.

What are the differences between the mortgage systems of different countries

Mortgage - is the process of issuing a loan on acquired property. The differences between the mortgage systems of different countries may be as follows:

  • Composition of market participants (this is not only lenders and borrowers)
  • Loan process (document package required and a methods to review an application)
  • First payment size
  • Mortgage rate (fixed or floating)
  • Legal regulation (first of all, the procedure for foreclosing property in case of bankruptcy of the borrower)

Adhering to this scheme, let's compare mortgage systems in different countries of the world. If you do not want to go into details, then scroll to the end of the article - there is a table with the main differences.

Mortgage market in the United States

USA - the world's leading economy where the mortgage market is critical for economy. The American mortgage market is the most developed in the world, and a fantastic number of loan options to choose a mortgage for almost any borrower. Important feature of the US market is the widest practice to securitize mortgage loans (selling mortgage debts to independent investors).

The securitization scheme is as follows: the bank issues mortgage loans, creates a pool of homogeneous loans, and he attracts cash from investors (mortgage-backed securities) secured by these loans. Under the traditional financial system you bring money to the bank and deposit it, and then the bank loans this money to mortgage borrowers, the securitization scheme substantially eliminates the bank from the transaction.

Securitized loans must meet certain criteria. The criteria are set by the three most popular government programs in America - Ginnie Mae, Fannie Mae, Freddie Mac. There are Mortgage-backed securities and they are freely traded in the market. Due to this scheme, it is possible to expand volume of attracted financing and redistribute bankruptcy risks from the bank to independent investors. Those loans that do not meet designated criteria are called jumbo or subprime, they are securitized and also traded on the market (admittedly, higher rates, as they carry a greater risk). Securitization is widely used in other countries of the world, including in Russia, however, it was especially widespread in the United States. Researchers consider securitization as key reason for mortgage crisis in 2007, which launched the global economic crisis in 2008.

It is also worth noting about other market participants such as the Federal Housing Administration (FHA) and the US Department of Veterans Affairs (VA). FHA provides mortgage insurance to borrowers who meet certain criteria, which reduces risks for lenders and improves lending conditions for borrowers (note that insurance provides for a fee). Affairs Committee Veterans provides mortgages to former military or their widows at more low rates and / or no down payment. The share of mortgage loans, issued under these preferential mortgage programs together is about 10%.

Other market players are underwriters and brokers. Underwriters (most often affiliated with banks) are involved in the assessment of the risk of a loan to a specific borrower. Brokers are independent players who have information about the offers of a large the number of banks. They are able to choose credit conditions that are preferable to specific borrower.

Document package required in the USA for obtaining a mortgage can vary greatly. It usually includes:

  • Loan Application
  • Detailed questionnaire with information about to the borrower (Appraisal Report)
  • Proof of income and current work
  • Bank account information, deposits and other savings
  • House (apartment) purchase agreement
  • Recent tax returns

However, there are mortgages issued on a limited package of documents (low doc loans) or no documents at all (no doc loans). Such loans are offered at a higher rate and with a higher first payment, but usually it’s easier to get. However, after the mortgage the crisis of 2007-2008, the share of mortgages issued without documents, gradually declining.

First payment in the USA also may vary significantly. Classic first payment is about 20%, but in some cases you can get a mortgage and without such payment (subject to certain conditions).

In the American real estate market, you can take loan both at a fixed rate and at a floating rate. Fixed rate allows you to pre-fix the amount of future mortgage payments, while in case of a floating rate the amount of payments can vary depending on the fluctuation of the average interest rate in the economy (you can both win and lose). Loans

variable rate mortgages were common in USA before the mortgage crisis of 2007 (their share in the total volume of loans reached up to 40%, and in the mid-1990s it was in the region of 60-70%), however today they has fallen to 4%. You can read about it in more detail in study by Moench, Vickery, Aragon (2010).

In some cases, the lender may restrict opportunities for early repayment, however, since 2010 (after the adoption of Dodd-Frank Act) banks have much less room for maneuver (early repayment is a risk for the bank, as in this case it will receive less income, as well as delays in repayment - for any bank, the most desirable is a client who pays exactly on schedule). Currently, prepayment penalties are allowed for only three types of loans:

  • Fixed Rate Loans
  • Qualified Mortgage Loans (qualified mortgages) - loans with special, more favorable conditions for the borrower (for example, loans with permission to repay only interest; loans for the term more than 30 years; loans with payments increases by the end of the term)
  • Loans with a rate lower than APOR (average prime offer rate - average mortgage rate loans in the economy)

And although the share of such loans in the total volume of loans issued is quite high, the step towards the protection of the rights of borrowers was made substantial. Very specific and legislative regulation of the mortgage market is in the United States. An important feature here is that

The process of transferring ownership and circulation foreclosure process is regulated by the regional legislation and varies greatly from state to state

In some states, lender owns property until the moment the borrower completely repay its debt (Title theory), while the borrower retains the right to use the apartment / house. In other states, buyer of real estate (borrower) owns apartment, however, the object itself is located in collateral at the lender (Lien theory). On the map below, the states are highlighted in red where Title theory is applied, and in blue the states where Lien theory is applied.

In the USA, both judicial and extrajudicial foreclosure procedure exists. Extrajudicial practice most commonly used in states with Title theory, while litigation is typical for states with Lien theory.

Essentially, in states with Title theory, the foreclosure process is as simple as possible - the lender simply evicts the borrower from home - and that’s all.

State-to-state and legal mechanisms vary in a situation where the market value of the apartment / house is not enough to pay off mortgage loan. In some states, borrower liability is limited to the value of the property (non-recourse debt), and even if it is not enough, the loan is considered repaid. These states include Alaska, Arizona, California, Iowa, Minnesota, Montana, North Dakota, Oregon, Washington, Wisconsin. In all other states, the borrower will be required to repay the full cost of the debt, even if the money from the sale real estate is not enough for this. More on enforcement mechanisms of the property (judicial or extra-judicial, recourse or non-recourse) in different states can be found in a study by Ghent, Kudlyak (2010).

Mortgage market in Russia

In Russia, the mortgage market at that moment is matured enough. However, in our country there is no such wide variety of loan options that are typical for developed economies.

The main market participants are banks and borrowers, while there are practically no specialized mortgage banks. Among state regulators, it should be noted the Agency for Mortgage housing lending (AHML, currently renamed as Dom.rf bank), which is engaged in the securitization of mortgages loans. The mechanism of its activity is similar to the American programs - Ginnie Mae, Fannie Mae, Freddie Mac. Agency buys from banks portfolio of homogeneous loans that meet certain conditions and issues securities secured by these rights of claim. Among other market participants issuing securities secured by residential real estate, Vnesheconombank should be noted. However, the share of securitized loans in the total volume of mortgage loans significantly lags behind the US and is 10-15% (according to reports of AHML). Mortgage brokers and underwriters in the Russian market actually absent, their functions are performed by banks (and specialized aggregator sites with mortgage offers).

A package of documents that is usually required in Russia for a mortgage, includes:

  • Loan application
  • Proof of income and current work
  • Information about property (real estate, bank accounts)
  • Credit history
  • House (apartment) purchase agreement

In general, the package of required documents in Russia is the same as in the USA, however in our country it is almost impossible to obtain mortgage loan in the absence of any of these documents, and this document are always required (even in case of large first payment).

The average first payment on a mortgage in Russia, according to AHML, is about 40%. Usually minimal first payment in Russia is rarely below 20-30%, and mortgages without first payment is practically absent.

Almost all russian loans are issued exclusively at a fixed rate.

In Russia, early repayment of the loan is allowed without consent of the bank (and without additional sanctions on its part) in the performance of two conditions: 1) a loan is issued to a citizen, not a legal entity 2) a loan it was not used for entrepreneurial activity (Clause 2, Article 810 of the Civil Code of the Russian Federation). The absolute majority of mortgages issued in the country fall under these conditions.

The legal regulation of the mortgage market is also significantly different from the USA. First of all, it should be noted that the ownership immediately goes to the borrower, exceptions to this rules are not provided. A levy on the mortgage object takes place in judicial procedure (Art. 51FZ-102), with the exception of a number of situations - for example, when extrajudicial procedure is foreseen in the contract (this rarely happens in practice). In case of borrower bankruptcy mortgaged property is sold through public tendering. If the value of the property was not enough to repay the monetary claims of the creditor, then the loan is considered repaid only if the borrower is an individual, and mortgage facility - residential premises (Clause 5, Article 61 of the Federal Law-102). In all other cases the borrower will be required to refund the difference. If after distribution of proceeds from the sale of real estate funds formed a surplus, this surplus will be returned to the borrower (Clause 1, Article 61 of the Federal Law-102).

Mortgage market in Great Britain

Organization of the mortgage market in the UK significantly different from both the American and Russian models. The main distinctive feature:

the largest mortgage lender in the country are building credit societies (building societies).

These are unions citizens built on the principles of self-financing, while lending goes only between members of the cooperative (some members of the cooperative receive income from placing funds in deposits, while others use these funds to mortgage terms). And although in recent decades the proportion credit building cooperatives in the supply of mortgages decreased from 90% up to 60% (part of the market was taken from them by traditional banks), their role in the mortgage system is still very large. In the Russian law also a similar tool (credit cooperative) is provided, but in practice they are very rare.

Package of documents provided for receiving loan, generally standard. Until 2014, there were widely popular mortgages issued without the provision of documents (self-sertification mortgages). The borrower did not provide documents, but simply vouched, that his financial situation allows him to service a mortgage loan (this is possible in credit cooperatives, where the factor of personal acquaintance plays a role). Such mortgages were actively taken by self-employed people, as well as people with variable incomes. Currently loans without documents are almost no longer provided because the regulator considers them highly risky. Initial installment is approximately comparable with the USA.

Unlike the United States and Russia, in the United Kingdom floating rate loans prevail. This is due to the features of the mortgage market in the country - as the costs of credit cooperatives are variable nature (interest paid on deposits), then they try to link its income with the amount of expenses. Also early repayment penalties is widespread.

If the debtor is unable to pay, foreclosure takes place, as a rule, in court. Wherein the lender receives a mortgaged house or apartment in his use, evicts from there the borrower and sells the object, reimbursing their losses from the proceeds. This process is called mortgage repossession (in some possession sources), and it should be distinguish from american foreclosure. The surplus resulting from the sale of an object shall be returned to the borrower (the same mechanism, as in Russian law), while in the United States in most cases, he remains with the lender. In case the proceeds insufficient funds, the non-recourse debt mechanism is applied (the loan is considered paid, the debtor does not apply to other property of the debtor).

Mortgage market in Germany

German mortgage market - largest in continental Europe. Its distinctive feature is the emphasis on high conservatism (unlike the USA, where there is an emphasis on high profitability).

The main volume of mortgage loans in Germany provided by banks, although the role of credit and construction cooperatives (similar to those popular in the UK) is also quite high. Most popular mortgage support program in Germany is KfW (Kreditanstalt fur Wiederaufbau). This is an additional loan that allows finance up to 30% of the cost of buying a home. Its main advantage is at a lower rate compared to conventional mortgages. As a rule, this loan is included in the general mortgage package, along with the loan taken on standard conditions.

Package of documents that must be provided for a loan in Germany, usually includes:

  • Information about the last 3 salaries
  • Last 2 tax declaration
  • Recommendation from work
  • Property information
  • Annual Report and Balance Sheet (for self-employed borrowers)

In general, this set of documents is identical to which is provided for obtaining mortgages in most countries of the world. But it is important to note that in Germany there are no loans issued for an abbreviated package of documents or no documents at all (unlike the United States and before recently UK).

Minimum first payment in Germany is 20%, and the average first payment is between 30% and 40%. Germany forbids loans issued without first payment, while while in the American and British markets such loans exist.

In Germany, several loan types are popular:

  • Fixed Rate Loans (Annuitatendarlehen) - standard fixed rate mortgages paid at annuity scheme (the amount of payment is fixed and includes repayment of principal and interest)
  • Loans with variable rates (Flexibles Darlehen) - the size of the mortgage rate is tied to the Euribor rate and is adjusted every 3 months. Typically, these loans provide the largest set of opportunities - every 3 months you can implement partial or full early repayment, as well as switch to a loan with a fixed rate.
  • Loans with repayment of principal at the end (Zinszahlungsdarlehen). Unusual for others countries loan type that assumes that during the term of the mortgage only interest is paid, and the main debt is paid off in a single payment at the end term (a similar scheme is used in many bond loans). Usually, the person saves the amount for repayment of the main debt separately, for example, deposit. Due to this scheme, it is possible to reduce the required amount of payments and decrease risks (for example, in case of temporary loss of work, you pay only interest and contributions on deposit put it off a bit later).
  • Loans received through building credit cooperatives (Bausparvertrag). The lending mechanism is generally the same as in the UK.

It’s important to note that all these types of loans are not only prescribed by law, but also widespread in practice.

Early repayment of the loan may turn into Germany a fairly large fine ( Vorfälligkeitsentschädigung), comparable to unpaid mortgage interest.

In Germany, it is common judicial treatment collection of mortgages. Extrajudicial procedure is possible for real estate, leasing and foreclosure takes place on cash flow, received by the owner (borrower from its use). Court order collection involves public tendering (auction) with preliminary involving an appraiser to determine the cost of housing. If the proceeds from the auction are not enough, the recovery applies to other debtor's property (subject to a number of restrictions). Excess amount refunded to the debtor.

Comparison of mortgage systems in the USA, Russia, Great Britain and Germany

For your convenience, we summarize the above information in the form of a table:

                                                                                                                                                                                                              
     USA      Russia      Great Britain      Germany   
  The main market participants      Banks, government agencies, brokers, underwriters      Banks      Banks, building credit cooperatives      Banks, building credit cooperatives   
  Mortgage support programs      Mortgage loan portfolio securitization      Mortgage loan portfolio securitization      Mortgage loan portfolio securitization      Co-financing loan   
  Loans without documents      Possible      Impossible      Impossible      Impossible   
  Mortgage rate      Fixed      Fixed      Floating      Fixed, floating, repayment of interest only   
  First payment      Zero first payment available      Zero first payment unavailable      Zero first payment available      Zero first payment unavailable   
  Early repayment      Fines are possible in some cases      Without limitations      Fines are highly probable      Fines are highly probable   
  Ownership transition      It depends on the state: either after the purchase of a home or after repayment of a debt      After home purchase      After home purchase      After home purchase   
  Foreclosure      It depends on state: extrajudicial or judicial      In most cases judicial      Judicial      In most cases judicial   
  House costs below debt      Collection of other property is possible depending on state      Loan deemed repaid      Loan deemed repaid      Collection of other property is possible   
  House costs more than debt      Surplus remains with the creditor      Surplus returned to the borrower      Surplus returned to the borrower      Surplus returned to the borrower   

Of course, in this article we give a simplified picture of what actually exists, omitting possible exceptions and rare situations that arise in real life. The main goal was to identify and compare the key features of mortgage systems in different countries and show the fundamental difference between them, and not describe the whole variety of mortgage legislation and types of loans in different countries. If you have something add or you still have questions, we invite you to comment on this article!

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