IDEAS home Printed from https://ideas.repec.org/a/wea/worler/v2016y2016i6p86.html
   My bibliography  Save this article

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

Author

Listed:
  • Timothy A. Wunder

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

Abstract

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.

Suggested Citation

  • Timothy A. Wunder, 2016. "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," World Economic Review, World Economics Association, vol. 2016(6), pages 1-86, February.
    • Handle: RePEc:wea:worler:v:2016:y:2016:i:6:p:86
    as

    Download full text from publisher

    File URL: http://wer.worldeconomicsassociation.org/papers/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/
    Download Restriction: no
    File URL: http://wer.worldeconomicsassociation.org/files/WEA-WER-6-Wunder.pdf
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    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, August.
    2. Christian E. Weller & Kate Sabatini, 2008. "From Boom to Bust: Did the Financial Fragility of Homeowners Increase in an Era of Greater Financial Deregulation?," Journal of Economic Issues, Taylor & Francis Journals, vol. 42(3), pages 607-632, September.
    3. Fadhel Kaboub & Zdravka Todorova & Luisa Fernandez, 2010. "Inequality-Led Financial Instability," International Journal of Political Economy, Taylor & Francis Journals, vol. 39(1), pages 3-27.
    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 Marshall & Elizabeth Concha, 2012. "Fannie Mae and Freddie Mac: A Bailout for the People?," Journal of Economic Issues, Taylor & Francis Journals, vol. 46(2), pages 557-564.
    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. David Zalewski, 2012. "Collective Action Failures and Lenders of Last Resort: Lessons from the U.S. Foreclosure Crisis," Journal of Economic Issues, Taylor & Francis Journals, vol. 46(2), pages 333-342.
    8. David Zalewski, 2011. "Too Important to Fail: A Reconsideration of the Lender of Last Resort Function," Journal of Economic Issues, Taylor & Francis Journals, vol. 45(2), pages 373-380.
    9. Timothy 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, Taylor & Francis Journals, vol. 46(1), pages 173-192.
    10. 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.
    11. Reynold Nesiba & David Sorenson & Kaleb Sturm, 2012. "Who Is Foreclosing on Whom? Home Mortgage Lending and Foreclosures In Sioux Falls, South Dakota, 2004-2010," Journal of Economic Issues, Taylor & Francis Journals, vol. 46(2), pages 323-332.
    12. 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.).
    13. Wynne Godley & L. Randall Wray, 2000. "Is Goldilocks Doomed?," Journal of Economic Issues, Taylor & Francis Journals, vol. 34(1), pages 201-206, March.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Charles J. Whalen, 2020. "Post-Keynesian institutionalism: past, present, and future," Evolutionary and Institutional Economics Review, Springer, vol. 17(1), pages 71-92, January.
    2. Ayşe İmrohoroğlu & Kyle Matoba & Şelale Tüzel, 2018. "Proposition 13: An Equilibrium Analysis," American Economic Journal: Macroeconomics, American Economic Association, vol. 10(2), pages 24-51, April.
    3. Fabian Lindner, 2014. "The Interaction of Mortgage Credit and Housing Prices in the US," IMK Working Paper 133-2014, IMK at the Hans Boeckler Foundation, Macroeconomic Policy Institute.
    4. David Cayla, 2013. "European Debt Crisis: How a Public Debt Restructuring Can Solve a Private Debt Issue," Journal of Economic Issues, Taylor & Francis Journals, vol. 47(2), pages 427-436.
    5. Bunting, David, 2009. "The saving decline: Macro-facts, micro-behavior," Journal of Economic Behavior & Organization, Elsevier, vol. 70(1-2), pages 282-295, May.
    6. Montalvo, José G. & Piolatto, Amedeo & Raya, Josep, 2020. "Transaction-tax evasion in the housing market," Regional Science and Urban Economics, Elsevier, vol. 81(C).
    7. Paul Calem & Jeanna Kenney & Lauren Lambie‐Hanson & Leonard Nakamura, 2021. "Appraising home purchase appraisals," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 49(S1), pages 134-168, March.
    8. Charles Ka Yui Leung & Joe Cho Yiu Ng, 2018. "Macro Aspects of Housing," GRU Working Paper Series GRU_2018_016, City University of Hong Kong, Department of Economics and Finance, Global Research Unit.
    9. Agarwal, Sumit & Amromin, Gene & Ben-David, Itzhak & Chomsisengphet, Souphala & Evanoff, Douglas D., 2014. "Predatory lending and the subprime crisis," Journal of Financial Economics, Elsevier, vol. 113(1), pages 29-52.
    10. Yuming Fu & Wenlan Qian & Bernard Yeung, 2016. "Speculative Investors and Transactions Tax: Evidence from the Housing Market," Management Science, INFORMS, vol. 62(11), pages 3254-3270, November.
    11. Eduard Hartwich & Alexander Rieger & Johannes Sedlmeir & Dominik Jurek & Gilbert Fridgen, 2023. "Machine economies," Electronic Markets, Springer;IIM University of St. Gallen, vol. 33(1), pages 1-13, December.
    12. Ahuja, Rishi & Barrett, Sean & Corbet, Shaen & Larkin, Charles, 2019. "A way forward: The future of Irish and European union financial regulation," Economic Analysis and Policy, Elsevier, vol. 64(C), pages 346-360.
    13. repec:esx:essedp:712 is not listed on IDEAS
    14. Ozlem Akin & José Montalvo & Jaume García Villar & José-Luis Peydró & Josep Raya, 2014. "The real estate and credit bubble: evidence from Spain," SERIEs: Journal of the Spanish Economic Association, Springer;Spanish Economic Association, vol. 5(2), pages 223-243, August.
    15. Charles J. Whalen, 2012. "Post-Keynesian Institutionalism after the Great Recession," Economics Working Paper Archive wp_724, Levy Economics Institute.
    16. Finn E. Kydland & Peter Rupert & Roman Sustek, 2012. "Housing Dynamics over the Business Cycle," NBER Working Papers 18432, National Bureau of Economic Research, Inc.
    17. Deeksha Gupta, 2018. "Too Much Skin-in-the-Game? The Effect of Mortgage Market Concentration on Credit and House Prices," 2018 Meeting Papers 512, Society for Economic Dynamics.
    18. John Simon & Tahlee Stone, 2017. "The Property Ladder after the Financial Crisis: The First Step is a Stretch but Those Who Make It Are Doing OK," RBA Research Discussion Papers rdp2017-05, Reserve Bank of Australia.
    19. Michael Warlters, 2023. "Stamp Duty Reform and Home Ownership," The Economic Record, The Economic Society of Australia, vol. 99(327), pages 492-511, December.
    20. Bernard Njindan Iyke & Sin‐Yu Ho, 2020. "Consumption and exchange rate uncertainty: Evidence from selected Asian countries," The World Economy, Wiley Blackwell, vol. 43(9), pages 2437-2462, September.
    21. Marcel Fischer & Natalia Khorunzhina, 2019. "Housing Decision With Divorce Risk," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 60(3), pages 1263-1290, August.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:wea:worler:v:2016:y:2016:i:6:p:86. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Jake McMurchie (email available below). General contact details of provider: https://edirc.repec.org/data/worecea.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.