Mortgage Capital and Its Particularities: A New Frontier for Global Finance

By Sassen, Saskia | Journal of International Affairs, Fall-Winter 2008 | Go to article overview

Mortgage Capital and Its Particularities: A New Frontier for Global Finance


Sassen, Saskia, Journal of International Affairs


The financial deepening of economies has become one of the major dynamics characterizing advanced economies. The ratio of global financial assets to global gross domestic product (GDP) was nearly 350 percent in 2006, a ratio that jumps to 450 percent in a growing number of highly developed countries, from the United States to Japan. (1) More generally, the number of countries where financial assets exceed the value of their gross national product (GNP) more than doubled, from thirty-three in 1990 to seventy-two in 2006. Securitizing a broad range of types of debt is a key vehicle for this financial deepening. Government and corporate debt have been subjected to securitization for several decades, with varying degrees of success. The extension of securitization into consumer debt, including mortgages, took off in the 1980s in the United States. Thus mortgage securitizing is not new; indeed, the first mortgage-backed security was invented in 1977, although it was not necessarily widely used at the time.

While mortgage securitization is not new, the current phase is an innovation that could play a critical role in the financial deepening of countries worldwide. What marks this innovation is the extension of securitization to subprime mortgages and to mortgages for low- and moderate-income households. This feature takes the option of a mortgage well beyond the most advanced economies and the middle- and high-income classes.

There are three aspects of this financial innovation at the heart of my thesis. First, the target population is vast, especially when globally linked financial markets facilitate the deployment of these instruments in a rapidly growing number of countries. India and China, but also Eastern Europe, have underdeveloped mortgage markets but rapidly growing middle classes, a prime combination for introducing this innovation. In many emerging economies it is foreign banks and financial services that are developing the mortgage markets. (2) Second, the character of the innovation rests in good part on speeding up the numbers of mortgages granted and their bundling in order to reach the necessary thresholds for sale in the capital markets. This changes the logic for granting a mortgage. The velocity of mortgage-bundling becomes more important than the credit-worthiness of mortgage grantees. Third, the low levels of financial deepening in many countries signal a large potential for the marketing of these mortgage instruments. From the perspective of finance, one measure of this potential development is the ratio of outstanding residential mortgage debt (that is to say, mortgage capital) to GDP in highly developed economies, e.g. 70 percent in the United States, compared with only 10 percent in each India and China.

For moderate- and low-income households, investment in housing can be conceived of as a mechanism for concentrating whatever small resources such households can command. What they have available beyond basic needs will go into securing housing. Thus a financial instrument that allows low- and moderate-income households to acquire a mortgage becomes a vehicle for extracting those funds, bundling them up into a financial instrument and selling them in the capital markets. It also becomes a potentially powerful vehicle for the financial deepening of economies, especially in so-called emerging market economies.

These particular types of mortgage-backed securities have the potential to deliver profits to wholesale finance, to devastate the savings of modest-income households and to lead to macro-crises. The potential for profits is vast, insofar as there are massive numbers of such modest households, and the aim is to have large numbers of securities bundled and then sold off rather than invested long-term. The potential for devastating household losses is also vast, as we have seen with the sharp jump from 2005 to 2006 in home foreclosures among low- and modest-income households under these new types of mortgages. …

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