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Setting a Principal to Interest Cap on the Issuance of Home Mortgages: a Proposed Change to Mortgage Underwriting Rules Designed to Control Housing Price Inflation

Listed author(s):
  • Timothy A. Wunder

    (Department of Economics, University of Texas at Arlington, USA)

Traditionally most home buyers in the US need a mortgage and the current system of mortgage origination creates an incentive for borrowers to offer bids on homes far higher than would be possible without that system. This has inflated home values, increased financial indebtedness, and has increased banking profits without extensively helping other players in the market. Over the past 50 years it has become easier to get a mortgage and it has become common for people to buy homes with little down and long repayment times. The result has been that for many borrowers almost all of the mortgage payment goes to pay for interest on the loan. In the 1950s, housing accounted for 22% of the household budget; that rose to 33% by 1980 and 43% today. The mortgage industry is supposed to help foster affordable home ownership yet, as currently instituted, it has resulted far greater expense leading to further hardships for those Americans with low incomes. This essay will explore how a rule to cap the principal to interest ratio in mortgage payments would impact the relevant institutions and offer an overview of how such a rule would guide society to a more socially desirable outcome.

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Article provided by World Economics Association in its journal World Economic Review.

Volume (Year): 2016 (2016)
Issue (Month): 6 (February)
Pages: 1-86

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Handle: RePEc:wea:worler:v:2016:y:2016:i:6:p:86
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  1. Jonas D. M. Fisher & Martin Gervais, 2011. "Why Has Home Ownership Fallen Among The Young?," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 52(3), pages 883-912, 08.
  2. Fadhel Kaboub & Zdravka Todorova & Luisa Fernandez, 2010. "Inequality-Led Financial Instability," International Journal of Political Economy, M.E. Sharpe, Inc., vol. 39(1), pages 3-27, April.
  3. David A. Zalewski, 2011. "Too Important to Fail: A Reconsideration of the Lender of Last Resort Function," Journal of Economic Issues, M.E. Sharpe, Inc., vol. 45(2), pages 373-380, June.
  4. Robert Guttmann & Dominique Plihon, 2010. "Consumer debt and financial fragility," International Review of Applied Economics, Taylor & Francis Journals, vol. 24(3), pages 269-283.
  5. Wesley C. Marshall & Elizabeth Concha, 2012. "Fannie Mae and Freddie Mac: A Bailout for the People?," Journal of Economic Issues, M.E. Sharpe, Inc., vol. 46(2), pages 557-564, June.
  6. Richard K. Green & Susan M. Wachter, 2005. "The American Mortgage in Historical and International Context," Journal of Economic Perspectives, American Economic Association, vol. 19(4), pages 93-114, Fall.
  7. Timothy A. Wunder, 2012. "Income Distribution and Consumption Driven Growth: How Consumption Behaviors of the Top Two Income Quintiles Help to Explain the Economy," Journal of Economic Issues, M.E. Sharpe, Inc., vol. 46(1), pages 173-192, March.
  8. Itzhak Ben-David, 2011. "Financial Constraints and Inflated Home Prices during the Real Estate Boom," American Economic Journal: Applied Economics, American Economic Association, vol. 3(3), pages 55-87, July.
  9. Dean M. Maki & Michael G. Palumbo, 2001. "Disentangling the wealth effect: a cohort analysis of household saving in the 1990s," Finance and Economics Discussion Series 2001-21, Board of Governors of the Federal Reserve System (U.S.).
  10. David A. Zalewski, 2012. "Collective Action Failures and Lenders of Last Resort: Lessons from the U.S. Foreclosure Crisis," Journal of Economic Issues, M.E. Sharpe, Inc., vol. 46(2), pages 333-342, June.
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