Mortgage consultant

Home mortgages are a relatively homogeneous product with the major difference being between fixed rate mortgages and those that are floating rate. Historical default rates across the world have generally been among the lowest of any asset class. There are a number of qualitative reasons why this is the case. Owner–occupiers have to live somewhere and their choice is usually between paying rent or making the mortgage payments; mortgages have a form of long-term option on property prices and given their typical term have significant time value. Mortgagors do not default simply because they have negative equity and this option is out-of-the-money. The personal consequences of defaulting on a mortgage are extreme and mortgagors will usually default only in extreme circumstances.
For default rates to rise sharply from their very low “normal” levels usually requires some combination of falling property prices, rising unemployment, falling wages and in the case of floating rate loans higher interest rates.
There are a few examples where mortgage default rates have soared and in recent years these have occurred in countries where there has been a form of managed foreign exchange system that has subsequently collapsed. Mortgagors who took out “cheaper” foreign currency loans found that the value and servicing costs of their loan in local currency terms shot up. Other factors such as falling property prices and higher unemployment also occurred in these cases but were of secondary importance.
In countries where mortgage securitization issues are common there is a wealth of data available on both default and loss rates. In the US these are available on a regional basis and can be analyzed by type of loan and borrower. Publicly available data in most other countries is either sparse or non-existent.
LIED rates vary with the remaining term on the loan and volatility of property prices. In the event of foreclosure banks usually act to sell the properties at auction.
Industry level statistics on home loans are less useful to specialist lenders focusing on segments where most lenders are not prepared to make loans. These include loans made where standard loan-to-value criteria are lowered (and this may be as a result of upfront subsidies on mortgagors’ legal and other costs), on older properties that are difficult to sell or to borrowers with an erratic earnings and employment history.
In some countries individuals may take out mortgages to purchase homes to let. These are riskier than loans to owner–occupiers and ability to meet payments is usually dependent on rental income. Such borrowers are at particular risk if they have taken out floating rate loans, interest rates rise and property prices and hence rental yields fall. Portfolio risks are particularly vulnerable to location concentration.