Has mortgage securitization stabilized U.S. housing markets?
| Author | Calvin Schnure |
| Position | IMF Western Hemisphere Department |
| Pages | 238-239 |
Page 238
The U.S. housing market has boomed in recent years, with real estate prices in many regions rising considerably faster than personal incomes and rents. In 2005, increasing signs of speculative activity-including more widespread purchases of second homes and an uptick in the use of interest-only and other mortgage loans that defer principal repayment-have concerned regulators and fueled a debate over whether the market may be subject to a correction in the near future.
To better understand the attendant macroeconomic risks, IMF staff examined how changes in the structure of mortgage finance have affected the real estate market. It found that the shift from bank to market financing-particularly the development of a national securitized market for mortgages-has helped spread risk and may also help reduce the amplitude of boom-bust financing cycles, thus lowering the volatility of both real housing activity and prices.
Until the late 1980s, mortgage lending was mainly a local business, and most mortgages were kept on the balance sheets of local depositories for the lifetime of the loan. The availability of mortgage credit depended on local financial conditions, including the level of deposits and capital at local banks and thrifts. In the aftermath of the savings and loan crisis in the 1980s, however, the U.S. mortgage market saw a dramatic shift from local to nationwide funding through mortgage securitization. This loosened the link between depository balance sheets and mortgage flows, and reduced the extent of stop-and-go credit cycles.
Changes in the structure of the mortgage market have also coincided with sharply lower volatility in real housing activity (see chart, next page). Residential investment spending exhibited pronounced cycles prior to the 1990s, with growth rates of 40 percent or more during booms, and similar declines during busts. This cyclical volatility has now diminished markedly, with housing activity growing at a more stable pace.
Housing prices have shown a similar convergence toward more steady growth over this period, helped by securitization and less volatile lending conditions.With mortgage lending subject to (partly regional) boom-bust financing cycles prior to the 1980s, even qualified home buyers were at times unable to obtain financing. This may have induced households to pay a...
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