The Latest from CoreEcon

Posted: 06 Oct 2008 05:31 PM CDT

In the Wall Street Journal, Australian journalist, Janet Albrechtsen gets on her high horse and tells the US how great Australia is on housing. Apparently, she claims that houses are not collateral in Australia and that if you take out a loan, regardless, you are liable for it. I am no expert on bankrupcy law but I assumed we had them and that these put creditors at some risk.

She goes on …

This is made worse by the fact that traditionally many American mortgages were typically set at a fixed rate for the 25- or 30-year life of the loan and the borrower often has the nifty ability to refinance without penalty. Most Australian mortgages are usually subject to a variable rate of interest. Fixed-rate loans are limited to around five years. So when Australian lenders offer a fixed-rate loan for five years, they fund it by borrowing five-year money. If borrowers want to repay a fixed-rate loan early, sensible economics require that they pay the lender a “break” fee, which compensates the lender for the lost interest the loan would have brought in had it been carried to term.

Yes, being able to pass on risk to home buyers with them having no options for anything else is just wonderful. Come on? In the US, you can get a variable rate mortgage. Turns out that you wouldn’t want to when given the option of a market-provided 30 year fixed rate loan. This is hardly surprising. The bank is better placed than the consumer to carry and diversify interest rate risk.

And then she laments the very institutions that have given US households this choice.

Fannie and Freddie dominated the mortgage industry because ultimately government was prepared to fund activities that prudent lenders would not. When their implicit government guarantee became explicit, America’s system of government-directed lending on socially desirable, but commercially imprudent, lending stood exposed.

To be sure, no one believes in implicit guarantees but as more informed commentators have noted, as an explicit guarantee, the government gets a great return from the activities of Fannie and Freddie.

And what is more, to imply that our politicians are free of driving home ownership is completely wrong. There is little difference between the Great Australian and Great American Dreams.