Academic journal article Academy of Banking Studies Journal

Mortgage Backed Securitization: When Does It Work?

Academic journal article Academy of Banking Studies Journal

Mortgage Backed Securitization: When Does It Work?

Article excerpt

INTRODUCTION

One of the perplexing problems for all nations is the housing of its people. The development of sophisticated public housing schemes is costly and involves significant public resources. The success of mortgage backed securitization in the US as a generator of housing finance is unquestioned. Commentators observe that since the mid-1980s, the techniques of securitization had begun to be introduced into an increasing number of national markets, including Australia. However, securitization has remained largely of marginal significance outside the US, and more recently, Australia. Why is this the case? While this question may be answered empirically in some years hence, a comparison of securitization in the US and Australia may shed some light on the answer.

It is often argued that one of the prominent factors in the growth of the market for mortgage backed securities in the US, has been the involvement of Government. This involvement occurred through the establishment of government agencies which actively supported secondary mortgage market activity, in addition to the development of the mortgage backed securitization process in 1970. The US Government's intervention aimed to achieve housing policy objectives through the operation of private housing and related markets, and it did this by providing underlying support for private housing finance markets. However, there were also other factors, which appear to be important in the development of the US market. For example, the legal, institutional and economic environments needed to support a successful secondary mortgage market, and subsequently mortgage backed securitization, had to be developed and maintained.

Securitization activity in Australia was, by comparison with the US, late in developing to any degree of sustainability. There were legal, institutional and economic factors inhibiting progress towards an Australian secondary mortgage market. While the technology of securitization was available from 1970, only during the 1990s, did Australian securitization activity achieve some degree of persistence, despite earlier attempts. Consideration of the reasons for this, relative to the US market, and an assessment of factors which impacted its move to market maturity, may provide us with some indication of the conditions required for the development of securitization as a useful and sustainable form of housing finance in any economy. From this comparison, contextual success factors are determined.

In this paper, through a comparison of the development of mortgage backed securitization in the US and Australia, an assessment of the importance of these factors is undertaken. Section 1 contains a comparison of the direct involvement of government in the mortgage market in each country. The role of government in the development of the housing finance markets in each country is then discussed in the light of the legal, institutional and economic frameworks, including market conditions, in Sections 2 and 3. In Section 4, the contextual success factors are identified. The final section provides a summary.

GOVERNMENT AND HOUSING FINANCE MARKETS

Governments have approached housing policy objectives in many diverse ways. US government housing policy since the 1930s has had two objectives: to provide a stimulus to the housing sector and thereby improve productive activity in the economy, and to provide adequate housing for its constituents. These objectives moulded the government's approach to housing and housing finance policy. The establishment of institutions and mechanisms that work in concert with the private sector, and the focus on a national market, have been hallmarks of the US government's approach. The consequent reliance on the private sector for home building and maintenance activity as well as the financing of housing, was a desirable outcome, which assisted in the reinforcement of the national approach to housing finance. …

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