Interesting ideas from Germany and US to protecting borrowing home owners and their lenders

In Banks, Financial competency, Financial planning, Property on 22/02/2020 at 2:38 pm

Recently I wrote in TRE cybernuts and central bank singing from the same song sheet that our central bank is worried that

Singapore property market faces risks from unsold units, uncertain economy: MAS

Here’s what the Germans do to protect banks and borrowers

German mortgage-lenders embrace an unusual appraisal technique. When assessing the value of a house, they rarely refer to market price; instead they consider “mortgage-lending value”, an assessment of the probable price of a house over the economic cycle. A report from the Bank for International Settlements, a club of central banks, suggests that by discounting short-term price fluctuations, this valuation technique can stop bubbles from forming. Lenders in America once embraced the technique, points out Ed Pinto of the American Enterprise Institute, a think-tank, yet after the second world war it fell out of fashion.

Meanwhile in America

Safe Rate, based in Chicago, offers a new type of mortgage. When local house prices decline, so do borrowers’ monthly mortgage repayments. The benefit for the borrowers is that they save money and are less likely to default. The advantage for investors is that, by preventing foreclosures, more mortgages will be kept going and it is less likely that house prices across a region will spiral downwards.

  1. The Yankee example seems out of box but the German example is possible because of the existence of the Pfandbriefe. The instrument is essentially a covered bond backed by a “Deckungstock” mortgage pool which unlike the Yankee version does not actually leave the mortgage lender’s balance sheet. This solution is impossible in SG becos there is no covered bond market and the reason there isn’t, is becos CPF takes the first mortgage claim. The German example makes mortgage cheaper(additionally the mortgage lenders are the sparekassens or savings banks whose existence is not the profit motive).

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