Why is the mortgage market so much more efficient in the US than in any other
country? Because far more of it is securitized than in any other country. Precious
few banks have either the capital or the inclination to hold onto their home
loans: they’re much happier farming them out in the bond market to institutional
investors. In turn, that means that borrowers can get lower rates, and risk
is dispersed to those parts of the financial markets which most want it.
But why is the market in mortgage-backed securities so much more advanced in
the US than it is in any other country? That one’s more interesting: it’s basically
because of the savings-and-loan crisis of the 1980s. When the edifice of S&Ls
came crashing down, there was simply no capital to extend to homebuyers, and
the capital markets had to get involved.
A liquidity crunch in the banking system, in other words, is something of a
prerequisite for an efficient housing market. No one’s expecting an MBS market
in China any time soon, because the banks are awash in liquidity and want
all those home loans on their books. In Mexico, by contrast, the tequila crisis
of 1994-5 set the stage for a reasonably large and efficient MBS market today.
Obviously, you need more than just illiquid banks to have a well-developed
MBS market. You need strong legal institutions, and you need a well-developed
domestic yield curve too. (India, for example, might have the former, but it
doesn’t really have the latter.)
It also helps if your economy is open to outside investment. In Mexico, domestic
pension funds buy the overwhelming majority of senior MBS tranches, but they’re
so risk-averse that they shy away from the riskier mezzanine tranches. That
all gets sold abroad – often to foreign hedge funds.
Prosperity is closely linked to homeownership. But to get there, the occasional
banking crisis might not be such a bad thing after all.