Why are housing finance systems different in different countries? What role does a micro structure of mortgage finance industry play in managing risks embedded in mortgage contract and in determining broader market outcomes? What lessons can be drawn from the experience of other countries if one plans to reform its own system? The current study aims to shed light on these questions by comparing the system of two developed economies—the United States and Germany—and suggests a few measures to one of the fast-emerging economies, India.

The US mortgage finance system is the most extensive one in the world. Total mortgage debt outstanding amounts to $7.4 tn as of 2005, 53% of GDP and significantly larger than the corporate debt sector as well as the treasury debt outstanding. Many lending institutions—mortgage banks, commercial banks, thrifts, and credit unions—compete for borrowers with the conventional and affordable loan products, such as high Loan-to-Value (LTV) loans up to 100%, sub-prime loans, and reverse annuity mortgages. Mergers and acquisitions, whether they are among small ones or among mega lenders, are constant and frequent events in the primary market. Over 50% of new loans originated are sold to the secondary market, where loans are structured into various mortgage-backed derivative securities and are traded as highly liquid assets in the capital market.

In recent years, certain mortgage products are also believed to have worked as a stabilization factor in the US, and helped save the economy from a major downturn. That is, thanks to the low mortgage interest rate combined with a strong home price appreciation, many households could cash their home equities by using products, such as Home Equity Line of Credit (HELOC) and Cash-Out Refinance (COR) loans. In particular, $1.3 tn of mortgages were refinanced during the last 18 months, which is shown to have a positive correlation with household consumption spending.

Applied Finance Journal, Managing Risks, Mortgage Finance System, Home Equity Line of Credit, HELOC, Gross Domestic Products, GDP, Mortgage-Backed Securities, MBS, Capital Management, Risk Management, Housing Finance System, Macroeconomic Sectors, Financial Service Companies, Global Financial System, Metropolitan Housing Markets, Portfolio Management.