An empirical analysis of the market for mortgage finance in the United Kingdom.
The purpose of this thesis is to empirically investigate the factors which drive the
demand for and supply of mortgage finance in the United Kingdom. In particular,
borrowers of long term mortgage funds are especially susceptible to the effects of
inflation in `tilting' the stream of real repayments towards the initial years of the loan.
As such, under certain circumstances inflation can be an important cause of mortgage
default and thus plays a crucial role in the determination of mortgage demand.
The mechanism through which mortgage default leads to households being possessed
by their creditors is examined empirically. The results suggest that the ability to
withdraw equity from the property either by remortgaging or `trading down' is
important for borrowers who face financial difficulties. In addition, a relaxation of the
non-interest terms of the mortgage contract is shown to lead to a rise in mortgage
default, although this does not appear to have dampened the willingness of either
mortgage borrowers or lenders to transact at high loan to value ratios.
Understanding the underlying forces which cause repayment problems gives an
important insight into the specification of both the mortgage demand and supply
functions. In formulating such models, it is imperative that the dramatic structural
changes in the market for mortgage finance are accounted for. This is particularly true
for the supply side, and a formal theoretical model of building society interest rate
setting is derived in which societies choose the degree to which they are either
`member-' or `profit-oriented'. Interestingly, the model suggests that up to a point a
building society may not alter either its mortgage or savings rate if its `preference for
mutuality' were to change.
Finally, reduced form cointegrating relationships for the quantity of mortgages traded,
the mortgage interest rate and the loan to value ratio are estimated. The results are
used to evaluate the extent of mortgage rationing during the 1970s; this research
reaffirms the findings of other papers and anecdotal evidence to suggest that
disequilibrium quantity rationing was substantial prior to 1980. In fact, a regime shift
in the early 1980s is confirmed by the change in the way mortgage lenders have used
combinations of the mortgage rate and the loan to value ratio to restrict lending.