Britain’s summer budget of 2015 introduced a little noticed policy extending the use of loans in its social security system. The development relates to support for mortgage interest for social assistance recipients who are buying their own homes. From April 2018 this support will be loaned, rather than granted. Its repayment is to be via a charging order on the homes of benefit recipients and/or from wages when they (re)enter wage work. In this paper, rather than exploring this development as a means of understanding housing-related benefits, it is examined in relationship to the use of loans in British social assistance provision. The paper demonstrates that this development in consistent with the philosophical underpinnings of loaning social assistance – a desire to minimise costs and to engender behavioural change – but it also involves new developments. For the first time in Britain loans of social assistance will attract an administrative charge and interest, and will ultimately be recoverable through a charging order.
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The effectiveness of SMI for borrowers, and the housing market, is dependent in part on the responses of lenders, advisers and Jobcentre Plus staff to the changes, each of whom have particular roles, concerns and interests. Lenders for example, can support or undermine the policy intent depending on their willingness to forbear with respect to arrears. For example, potentially, they can change a mortgage from requiring both capital and interest payments to an interest only arrangement and so maximise the impact SMI can have in preventing or limiting arrears. Advice agencies have a role to play in ensuring borrowers know of any eligibility for SMI, as do Jobcentre Plus staff. Along with identifying cases where SMI is payable, Jobcentre Plus staff are also responsible for assessing claims and for the overall administration of SMI for working-age claimants. Phase 2, therefore, considered the approach and activities of four groups of actors; lenders, money advisers (in organisations such as Citizen Advice Bureaux, housing charities, local authorities), Jobcentre Plus staff and key policy and industry stakeholders and the impact their actions had on the effectiveness of SMI. In-depth qualitative interviews were undertaken with nine lenders including both prime and sub-prime lenders, six advice workers in different agencies and parts of the country, staff in six Jobcentre Plus offices with experience of identifying and processing SMI applications 3 , and
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The key novelty of the study is the quantitative analysis of fiscal policy, in an economy in which the health of the banking system is a key determinant of interest rates and real activity. We assume a rich fiscal policy setup, with distorting taxes, government consumption and investment, and transfers to households and the banking system. A representative bank receives deposits from savers (patient households), and makes loans to impatient households who use their house as collateral. The bank also invests in domestic government bonds, and in foreign bonds. Importantly, the bank faces a capital requirement: she has to finance a fraction of her assets using her own funds (equity). This requirement reflects legal requirements and market pressures. In this structure, bank capital is an important state variable. A loan default lowers bank capital, which raises the spread between the mortgage lending rate and the deposit rate, and leads to a fall in investment, employment and output. Government support to the bank, modeled here as a public transfer to the bank financed by higher taxes, boosts bank capital, lowers spreads, and raises investment and output. Investment drops sharply in financial crises. Thus, government support for banking stabilizes a component of aggregate demand that is especially adversely affected by financial crises. By contrast, higher government consumption crowds out consumption and investment.
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In June 2014 the ECB issued a package of measures utilising a strategy comparable to that of the UK’s ‘Funding for Lending Scheme’ (FLS) overseen by HM Treasury and the Bank of England. In August 2012 the FLS began offering cheap loans for up to a period of four years to financial institutions that demonstrated increased mortgage and SME lending. However, the FLS has not managed to successfully stimulate a significant increase in lending to SMEs in the UK. Notwithstanding, the ECB is set to enact a ‘Targeted LTRO’ (TLTRO) scheme that facilitates expanded access to cheap financing for SME lending (Mullineux, 2015). In order to support this scheme and to stimulate the future SME lending market, the ECB is also considering the benefits of buying SME-loan backed securities. When evaluating studies for relevance to these issues, it is important to note that most of the available literature on unconventional monetary policy does not consider the ECB’s 3 year long-term refinancing operations (LTROs) which were carried out in December 2011 and February 2012 where a total sum of €1 trillion cheap loans was injected into the banking system in order to facilitate lending by bank to SMEs that were hit by the crisis in the Eurozone. 8
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Using a unique dataset from over half a million mortgage applications by owner-occupiers in Australia between 2003-2008, we establish the dominance of mortgage cost in deter- mining the product chosen, consistent with the existing literature for other markets. However, we shed new light on the role of borrower characteristics due to the rich detail in our complete individual, bank-verified loan application data – unlike existing studies we do not rely on interpolated or survey based measures. We find that income risk increases the probability that the household will take a product which reduces its expo- sure to payment variability, at least in the first part of the contract; mobility risk leads households to choose more flexible VRM products. The HM and SFRM products help households manage their income and wealth risk, but also allow constrained households to enter the housing market when they believe that potential rising house prices and rising inflation will result in a real wealth transfer from creditors to debtors. In addi- tion, high LTV (LTV> 80 percent) borrowers bear the interest rate risk of a VRM if they have high, unstable income (they are self-employed), have a strong mobility motive and are potentially financially experienced. These high LTV borrowers are more likely to prefer the certainty in SFRMs or HMs if they have low, unstable income or receive income stream support. Low LTV (LTV≤ 60 percent) borrowers bear the interest rate risk of a VRM when they are older, wealthier and potentially financially experienced. However, low-LTV, risk-averse and constrained borrowers, who may be financially inex- perienced, are more likely to choose away from VRMs. In our study, HM and SFRM products are shown to fill a niche of facilitating housing purchase for wealth constrained and consumers averse to income risk.
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purchasing purposes is about 14% higher than that for acquisition purposes only. If the household has a second mortgage on the HMR, the size of the mortgage under investigation is 40% (i.e. 1- exp(- 0.542)) lower than the average mortgage in the sample. Households with mortgages for other property than the HMR borrow on average 44% (i.e. exp(0.365)-1) more than households without such mortgages. Perhaps those households are more creditworthy as they own a second property. It is also possible that they need to borrow more as they have a lower down payment. The estimated permanent income coefficients support Follain and Dunsky (1997)’s theory of a non-linear permanent income effect as the relationship is positive for liquidity-constrained households and negative for non-constrained households. However, the estimated coefficients are not significant. Apparently, permanent income affects the mortgage amount only indirectly. Likewise, an inheritance or gift prior to the mortgage only affects mortgage amount through its effect on the house price. Unlike Black, Schweitzer, and Mandell (2001) & Vandell and Thibodeau (1985), we do not find that the fluctuating income of the self-employed restricts the granted mortgage amount. Maybe self- employed households have greater mortgage demand as they invested their savings in their own business. The future income prospects of those with higher education increases the mortgage amount granted by 8%. Households with children aged 18 years or older have larger mortgage amounts than average. Those households might experience an increase in income in the near future when their children leave home. New houses require an estimated 15% (i.e. 1-exp(-0.158)) less borrowing than existing houses. This may capture another wealth effect; households who can afford new construction have less need for a loan. Another reason for the smaller borrowed amount might be that they already owned the residential land
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The DCC model applied in this paper uses fractionally differenced data, controls for structural breaks and also controls for a number of non-interest-rate-related house-price- influencing variables. We find that correlations between house prices and mortgage interest rates are largely positive. Although this is contrary to theoretical expectations similar results are found elsewhere in the literature (Sutton, 2002). We also find evidence to suggest that the financial crisis has had a structural impact on the conditional correlation. The impact on correlations across England and Wales as a whole was found to be positive; it increased by 6.6 percentage points in absolute terms in respect to the three-year fixed mortgage interest rate and also by 6.4 percentage points in respect to the standard variable rate. We also find some weak evidence to suggest the existence of regional differences in the response of the transmission relationship to the crisis. However, these findings have limited statistical significance and we therefore conclude that there is no substantive evidence to support the hypothesis of regional variation in the response of correlation to the crisis. We also found some evidence which suggest that the impact of the ‘credit crunch’ may have been partly displaced into the rental market. Rents have been seen to rise significantly which we suggest may possibly be a response to increases in demand resulting from prospective buyers being unable to finance house purchases 29 .
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I am writing to inform you that I am currently in prison on remand and my case is to be heard on (date of court hearing if known). In the meantime, I am unable to meet the repayments on my mortgage (number ). I have applied to the Jobcentre Plus/social security office* for income support to cover the interest element of my repayments. Please notify the Jobcentre Plus/social security office at
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Support for reversing the MIR changes was analysed by different variables. The relationship between size of portfolio and support for reversing MIR changes is shown in Figure 2.4. Respondents with larger portfolios were more likely to state that reversing MIR changes would lead to them being more willing to let to under-35s. Reversing the MIR changes would make the most difference to the intended letting strategy of respondents:
While not underestimating the problems of benefit transition (for instance in securing the support of mortgage lenders and those providers exposed to cash flow risks from significant changes to housing benefit), we think that, Devolution Max would also allow the Scottish Government to examine housing subsidies across the system as a whole, with the ability to set both rent policies and demand side subsidies in a way that is frustrated by the current Housing Benefit system’s constraining features. It is inconceivable the system could be reformed radically without Devolution Max (unless of course the UK Government took the same route and then this whole debate would be moot).
The other factors could have impact on the household leverage instead. Our analysis revealed that the leverage was infl uenced signifi cantly by GDP and the price of own housing (measured by the house prices index and the difference between own and rental housing). Our positive effect of GDP is consistent with the Wolswijk‘s positive effect of wealth, i.e. a higher GDP or disposable income as well as possession of stocks could increase affordability of own housing or lead households to invest more to houses. Our negative effect of the price of own housing is opposite to the Wolswijk’s positive effect of house prices. According to his result the higher prices could raise amounts of mortgage necessary to take up or could provide an incentive to acquire a house in order to make a profi t in the future. The interest payment and population structure factors could impact the household leverage as predicted but these estimates were not signifi cant in our analysis. On the other hand fi nancial deregulation measures and consumer price infl ation had signifi cant effects in the Wolswijk’s models. While fi nancial innovations probably made mortgages available for a larger part of the population the consumer price infl ation refl ected in higher nominal interest rates could reduce the mortgage demand.
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Financial frictions on the borrower side and impact for monetary policy transmission are also explored in recent empirical studies. Den Haan et al. (2007) study the effect of a non-monetary shock (real income decrease) controlling for interest rate variation and find that C&I loans decrease while real estate and consumer loans show no significant responses. Sanjani (2014) conducts a joint study of default risk and the maturity mismatch channels of the monetary transmission and finds the latter to have a stronger impact over business cycles. Bachmann and R¨ uth (2018) study the macroeconomic impact of changes in residential mortgage market LTV ratios. They show the monetary authority in the U.S. tends to respond to increases in the LTV ratio changes directly. They further argue accordingly that an exogenous increase of the LTV ratio is unlikely to create a housing market boom in times of conventional monetary policy. In this paper, I include their LTV ratio data series to study the mechanism relating to financial and mortgage market conditions. I do find similar results as Den Haan et al. (2007), namely that the C&I loans are more sensitive than real estate loans to non-monetary downturns. For systematic monetary policy, I find that the Federal Reserve did not react as aggressively to financial condition tightening after the Great Recession, complementing the results by Bachmann and R¨ uth (2018).
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From a household demand perspective, the option to fix for longer-term horizons would allow them to balance repayment risks with other factors such as income volatility. The use of longer-term fixed rate mortgage loans in the Irish market could also benefit households, by increasing transparency and stability for borrowers (CCPC, 2017). However, it is important to note that while in the short to medium term, rate fixation may be desirable for certain households given the expected upward path of interest rates, long-term fixed rates do remove flexibility and the ability of a borrower to potentially benefit from any fall in interest rates during an economic downturn. It has been well established that factors such as financial literacy, risk preference and interest rate expectations all feed into households’ choice of mortgage contract (Devine et al., mimeo). Information, increased awareness of the different loan options available in the market, and educational programmes that improve households’ understanding of complex choices would likely lead to a more optimal choice of interest rates.
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The demand for and supply of housing are heterogeneous and differ across countries, provinces and cities. In the Namibian context, the housing market has experienced a substantial increase in house prices. Such an unexpected growth rate in house prices suggests that the Namibian housing market may not be sustainable in the long term. This means that there is a high probability of a housing price bubble in Namibia if the house prices continue to increase. The aim of this study was to conduct an econometric analysis of endogenous and exogenous determinants of house prices and new construction activity in Namibia. This study also attempted to establish whether there is evidence of overvaluation of house prices in the Namibian housing market and this is important in identifying the possibility of a housing price bubble in Namibia. In addition, the study is relevant during the current period where Namibia is faced with a continuous increase in house prices. A restricted VAR model with a Johansen cointegration approach was used to analyse monthly data from January 2000 to December 2014. The selection of the data set was aimed at providing representatives for various housing demand drivers and housing supply determinants. For modelling on the supply side, new construction investment as a percentage of GDP was employed. The other variables incorporated as exogenous variables include the economic growth rate, the consumer price index, nominal wages as a percentage of GDP, the short-term interest rate, mortgage loans as a share of GDP and population in the 15-64 cohort as a percentage of GDP. Results show that the house price index in Namibia has proved more sensitive to changes in population, mortgage loans and inflation; whereas the construction activities were found to be more sensitive to the house price index and inflation. Granger causality results show that there is a bidirectional causality between the house price index and new construction activity in Namibia. The study therefore found evidence of overvaluation of house prices in the Namibian housing market, which may lead to a house price bubble in the Namibian economy. Namibian policymakers, through the Bank of Namibia, should come up with policies which ensure that the majority of mortgages given by the banks are for constructing new houses instead of financing the purchase of existing houses.
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products created during the housing bubble. It must be noted that rapid growth in home buying and thus the growth in mortgage assets was a result of public policy pressures to increase homeownership in the U.S. The resulting growth of mortgage companies, especially some tied to real estate companies and to thrift institutions, led to substantial changes in the processing of mortgage applications and to new channels of financing at increasingly competitive prices. T his trend was reinforced by banks’ movement away from the “ originate and hold” model to an “originate and distribute” model . Under the new model, banks made and serviced mortgage loans, but sold the loans to investment banks and government sponsored entities (GSEs) Fannie Mae and Freddie Mac, who in turn packaged the loans into pools against which they issued securitized mortgages. These purchasers, especially some investment banks, went one or more steps further, pooling these securities to create collateralized debt obligations and even more esoteric versions of these instruments. The initial mortgage securitization instruments and process were not new, however; they had existed for 15 to 20 years. What was new and especially problematical was including risky subprime mortgages and especially adjustable rate subprime mortgages, in these packages. Adjustable rate subprime loans grew rapidly in 2004-2007 just as market interest rates were rising, so that earlier loans of this type were resetting to, in many cases, unaffordable levels.
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where m denotes the continuous mortgage payment rate, i.e., the borrower pays mdt (dollars) to the mortgage con- tract holder (the lender) for each time period dt. Math- ematically we have a free boundary problem where the free boundary x = h(t) defines the optimal market inter- est rate level at which the borrower should terminate the contract. For the continuation region where x > h(t), the contract is in effect and the value of the contract sat- ifies (1). For the early exercise region where x ≤ h(t),
The dominant asset of mankind is his homeownership which is mostly achieved through the dominant liability of mortgage (Hinch et al., 2015). A Eurozone study by Ehrmann & Ziegelmeyer (2014) corroborated the dominance of mortgage liability in the aggregate households’ debt. The mortgage debt liability in Euro zone area constitutes the average of 63 percent of the total households’ debt. Although there is consensus on this source of housing finance, literatures on the field vary across countries and regions. While literatures in the advance nations are mostly empirical and dwell mostly on how the mortgage financing affects the other aspects of the economy, most literatures in developing nations are theoretical in nature and dwell mostly on the problems of financing.
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American leverage also powered more general economic growth, enabling the United States to out- grow its rich country peers and enjoy its own version of the Icelandic Land Rover boom. US GDP per capita increased 33.5 percent from 1991 to 2005, versus an OECD average of only 28.1 percent. While the crisis shows that some of this US growth is fictitious, the same is true for the laggards (Germany at 17.3 percent and Japan at 13.3 percent), whose growth largely depended on exports to a turbocharged US economy. Home mortgages were central to both borrowing and growth. Households borrowed against home equity – the value of their houses net of mortgage debt – and then spent that equity.
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Abstract Under current low interest rates, the decision whether or not to refinance a mortgage is a timely and practically useful topic. However, the home mortgage refinancing decision is also affected by other variables such as personal tax rate. In addition, financial institutions provide different types of mortgage loans in terms of maturity (loan period), interest rate, processing cost, points (bank fee), and so forth. Several websites are available which can be used to aid making the refinancing decision. However, these websites programs are not explicitly geared towards selecting a low cost mortgage loan. Furthermore, these websites are limited in their usefulness due to inadequate assumptions or the difficulty of acquiring information required for the program. For example, a certain website requires information such as the expected future interest rate, the expected inflation rate, the standard deviation of mortgage interest rates, and so forth. To be practically useful, the assumptions should be simple and reasonably realistic. The objective of this paper is to prepare, under realistically reasonable assumptions, an Excel program which can select a low cost mortgage loan after consideration of the tax deductibility of mortgage interest rate. This paper can be used as a case problem for both undergraduate and MBA students. From the case, students learn how Excel (or any spread sheet program) can be programed and used to analyze finance problems.
In our paper, we wish to determine which period is a better choice for debtors to refinance. The study has found some important properties for refinancing. First, the possibility of refinancing in the early stage may surpass 90%, which implies that debtors should refinance early. Second, the frequency curve arrives its peak at the last half of the first year. After that, the frequency of refinancing will drop and the coincidence increases at first and decreases after its peak value. Finally, a duration neither relatively too long nor too short is regarded as a perfect solution, i.e., a duration of 90 months (7.5 years) is relatively too long to the whole duration of 20 years. In consideration of these four properties, the debtors should refinance in the period of the 1st to the 60th month when the interest rate is locally low, for contract conditions and market rate movement specified in this paper. That means in certain month when the interest rate will be expected to fall down to certain lower enough level, it is probably the best time to refinance.