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S economy once the envy of the world is now viewed

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Unformatted text preview: S. economy, once the envy of the world, is now viewed across the globe with suspicion. America has become shackled by an immovable mountain of debt that endangers its prosperity and threatens to bring the rest of the world economy crashing down with it. The ongoing sub-prime mortgage crisis, a result of irresponsible lending policies designed to generate commissions for unscrupulous brokers, presages far deeper problems in a U.S. economy that is beginning to resemble a giant smoke-and-mirrors Ponzi scheme. And this has not been lost on the rest of the world.- Hamid Varzi, "A Debt Culture Gone Awry," International Herald Tribune , August 17, 2007. In this chapter we take a brief look at housing markets beyond the U.S. borders. While countries organize their housing and mortgage markets quite differently across the globe, very few have the level of government support for home ownership of the United States. Indeed, none have institutions quite like Fannie Mae and Freddie Mac (and the extensive apparatus of other government-sponsored enterprises). This makes other countries interesting cases to study when considering a radical overhaul of the United States’ housing finance system. Is a high level of government participation in mortgage markets necessary? An important conclusion is that many countries with less government involvement in housing finance institutions, when compared to the U.S. experience, have comparable home ownership rates and comparably affordable housing. It also is the case that the extensive government intervention in housing markets in the U.S. has not helped avoid a large drop in mortgage market activity and in house prices during 2006-2010 compared to other countries. In fact, house prices fell by less and the rebound was stronger almost everywhere else, with the exception of Ireland and Spain. It is indeed paradoxical that the country with the most vibrant private market for raising equity has the greatest government presence in mortgage-related fixed-income markets. But this may precisely be the reason that its equity markets have remained relatively robust to the Great Recession, but that the mortgage markets continue to remain moribund in spite of the (even) greater government presence than in the past. 89 7.1 Housing Finance Institutions and Home Ownership across the Globe Housing finance differs markedly across the world along several dimensions. Here is a brief account of the important differences. 7.1.1 Who Funds Mortgage Credit? There are three major funding models for mortgage credit in developed economies. The first one is the deposit-based system, where banks originate mortgages funded by deposits and hold the mortgages on their books. Figure 7-1 shows that this “old model of banking” is still the dominant type of mortgage finance in most countries outside the United States. The benefit of this system is that the lender retains the risk of mortgages and has appropriate incentives at the time of origination. The cost, as generally argued, is that this originate-to-hold model renders mortgages illiquid and limits mortgage funding to the supply of...
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S economy once the envy of the world is now viewed across...

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