This report discusses mortgage markets in selected nations and identifies aspects of housing finance that may suggest interesting policy options as Congress debates housing finance reform in the United States. The report describes similarities and differences in a number of countries by comparing homeownership rates and changes in housing prices. It examines features of each country's primary mortgage market, which homebuyers directly experience when applying for and obtaining a mortgage; and it discusses the secondary mortgage market connections that link national mortgage markets and international financial markets. The report concludes by tentatively identifying what may explain why mortgage markets in three of the four countries examined appear to have more differences than similarities, yet have led to similar rates of homeownership. This report concentrates on the United States, Canada, Denmark, and Australia, occasionally mentioning other nations to provide context. Canada was selected because of its proximity to the United States, similarity of its economy to that of the United Stages, and the distinctive attributes of its housing market. Homeownership rates in Canada and the United States are similar, but Canada has stricter mortgage qualifications (i.e., underwriting standards). Both nations have experienced home price increases over the past 10 years, but Canada has had neither the price level collapse nor the increase in foreclosure rates that the United States has had. Canada funds its mortgages mainly with bank deposits, whereas the United States depends on domestic and international financial markets. The homeowner in the United States typically has a 30-year fixed-rate mortgage (FRM), whereas the Canadian homeowner has a five-year adjustable-rate mortgage (ARM) that is renewed and is designed to be paid in full after 25-30 years. According to the Organization for Economic Cooperation and Development (OECD), Canadian home prices reached a maximum in 2007 that was 60% higher than in 1991, whereas another index developed by Teranet and the National Bank of Canada shows prices continuing to increase. U.S. home prices reached a maximum in 2006 that was 61% greater than in 1991. Denmark is included because it has very strict underwriting standards and has developed a type of covered mortgage bond with specific collateral to guarantee payment if the bond issuer fails. This is similar to covered bonds throughout much of the European Union (EU), including Germany. Homeowners in Denmark can prepay their mortgages by paying either the unpaid balance (as in the United States), or the market value of the mortgage. This market value will be less than the unpaid balance when interest rates have increased. Denmark and the United States are the only two nations where 30-year fixed-rate mortgages are common. Danish house prices reached a maximum in 2007 that was 150% greater than the 1991 house price level. Most Australian mortgages have adjustable interest rates. Australian homeowners can make extra payments on their mortgages; these prepayments can be withdrawn, sometimes by a special credit card. Between 1991 and 2009, home prices in Australia increased by 107%. Broadly speaking, homeownership rates are determined by the relative costs of housing tenure options (renting versus owning) and the nonfinancial aspects of owning or renting a home. These factors can vary according to a household's income, savings, age, marital status including number of children, the tax system, anticipated house price changes, government regulations such as land use and zoning, building codes, immigrant status, and availability of desirable rental housing. Some factors including income, age, and family status can affect a person's decision to move out from their parents' home and to form an independent household. Because most homebuyers use a mortgage to finance their purchase, mortgage terms can affect homeownership rates. Homeownership rates vary over time and within a country. For example, in the United States, the national seasonally adjusted homeownership rate reached a peak of 69.4% in the first quarter of 2005; since then, it has trended down with occasional, slight upticks. As an example of regional variation in homeownership rates within the United States, in the second quarter of 2010, the Midwest had the highest rate (70.8%) of any census region, and the West had the lowest rate (61.4%). As shown in Table 1 , homeownership rates for selected developed countries in Europe, North America, Australia, and Asia range from approximately 35% to approximately 97%. The European Union (EU) reports an average homeownership rate of 66.8% with national rates ranging from a low of 43.2% in Germany to a high of 97.0% in Lithuania and Romania. Germany's relatively low homeownership rate is frequently attributed to a policy emphasis on supplying subsidies to rental housing and the integration with the former German Democratic Republic (East Germany). Outside the EU, Switzerland has long had a relatively low homeownership rate (34.6%) that is usually attributed to a high cost of ownership and strong protections for renters, including limits on rent increases. Lithuania and Romania, both EU members, had high homeownership rates following privatization initiatives after their transitions from communism in 1989 and presently lack alternative rental housing. Australia reports a homeownership rate of 69.8%, whereas Japan's homeownership rate is usually estimated around 60%. Figure 1 displays the homeownership rates, graphically sorted by the rate. A cautionary note: As a result of differences in the ways that countries collect and report data, international comparisons of homeownership rate statistics can be misleading. For example, in the United Kingdom, units with long-term rental contracts are considered to be owner occupied, and in Japan dwellings owned by an occupant's parents are listed as owner occupied. In many countries, real (inflation adjusted) house prices were relatively stable from 1991 until approximately 2000. Between 2000 and 2008, prices increased in real terms, peaked, and declined. In this latter time period, most OECD-member countries experienced at least one year of rapid, real house price increases greater than 10%; the greatest price increase (28%) occurred in Ireland during 1998. The United States' maximum annual price increase was 8.2% (2005), Canada's was 9.8% (2006), Denmark's was 19.3% (2006), and Australia's was 16.0% (2003). Between 1991 and 2008, U.S. house prices increased 50%. House prices in Canada increased 60%, Denmark 150%, and Australia 107%. Nations with the largest house price declines since reaching their maximum were Ireland (-0.53), the United States (-0.16), and Iceland (-0.13). Real house prices do not always increase. Between 1991 and 2008, real house prices declined in Japan, Korea, and Switzerland. Figure 2 graphs the price levels for the United States, Canada, Denmark, Australia, Japan, Ireland, and the United Kingdom. The graph emphasizes the point that many other nations had greater increases in housing prices than the United States did. This section discusses how the mortgage interest rate paid by a homeowner is determined in the United States, Canada, Denmark, and Australia. It begins by describing a widely used framework for explaining how mortgage interest rates are determined in the United States and then applies the same framework to the other nations. In a benchmark competitive economic model, the interest rate on a fixed-rate mortgage (FRM) depends on four sets of factors: (1) the interest rate for a riskless government bond with the same life; (2) adjustments to reflect borrower risk; (3) adjustments to reflect risks associated with the characteristics of the property; and (4) adjustments to reflect the differences between the government bond and the mortgage. The mortgage industry term for the sum of these adjustments to the base rate represented by the riskless government bond to adjust for risks and structural differences is spread . In the United States, the rule of thumb is that a 30-year FRM is paid off in 7 to 10 years. As a result of the 7-to-10-year life, most mortgage calculations are based on the interest rate on a 10-year Treasury bond. For example, a decrease in the interest rate on 10-year Treasuries will lead to lower mortgage interest rates and more prepayments as borrowers refinance their mortgages to take advantage of lower interest rates. Adjustable-rate mortgages (ARMs) use one of a variety of interest rates plus a mark-up or spread instead of Treasury bonds as the basis for determining the interest rate paid by the borrower. In many economic environments, lenders are willing to offer ARMs with lower interest rates than similar FRMs because the interest rate increases if the index rate or reference increases; this protects the lender against being locked into a loan that pays less than other loans. Borrowers can find ARMs attractive because of the potentially lower interest rates, the chance of future decreases in the mortgage rate, and limits (caps) on the increase in the interest rates. An ARM with a lower or "teaser" initial rate can be attractive to a homebuyer who plans to move before the teaser rate ends. Borrower risk is typically assessed in terms of credit history (perhaps summarized by the borrower's FICO [formerly Fair Isaac Company] score), and debt-to-income ratio. The better an individual's credit history and the lower the debt-to-income ratio, the lower the spread that will be charged. Property characteristics that influence risk assessments include the loan-to-value (LTV) ratio, and the type of property (owner occupied, investor, condominium, and manufactured housing). In general mortgages, with high LTVs, and mortgages on investor-owned property, on condominiums, and on manufactured housing properties are considered riskier and pay a higher interest rate. Sometimes lenders add a risk premium based on the location of a home.