Mortgage Crisis

consumer advocacy group,

government entity, and/ or the banks.



Mortgage Crisis

consumer advocacy group,

government entity, and/ or the banks

The ongoing “subprime” mortgage crisis in the US sharply poses the need to reassess recent trends in the credit systems of middle-income economies. Since the late 1990s, lending in many of these countries has dramatically reoriented towards consumption and mortgage credit, including to poorer households previously excluded from formal lending. The entry of foreign banks has helped prompt this shift, as has the development of secondary markets for such loans. Most foreign banks in middle-income countries have focused their lending operations on consumer and mortgage credit. A range of domestic financial institutions have followed suit, also developing profitable strategies for lending to individuals (Ashworth P and Davis E P Pp. 12-13.).

Credit to households has grown significantly as a result, including through credit card lending, mortgages, financing by durablegoods retailers, and loans collateralised by borrowers' payrolls. Foreign banks have also been prominent in the secondary debt markets of middle-income countries, issuing, underwriting and buying mortgage-backed securities (MBSs) and other debt-backed securities. These markets have grown considerably in recent years. In Mexico, for example, US$4.7 billion worth of MBSs have been issued since 2003, US$1.7 billion of this total after the outbreak of the US “subprime” crisis. Most of these securities are backed by mortgages to low-income households. The trends in consumption and housing loans and shares of foreign bank loans. World Bank Promotion The World Bank has been instrumental in promoting these developments through advocacy, research and finance. As early as 1988, it argued for the removal of restrictions on the entry of foreign banks; by the mid-1990s it had also provided the key research papers supporting foreign entry. More recently, IFC programmes have helped finance the expansion of consumption and mortgage lending, granting more than US$1.5 billion for mortgage-backed securities and similar instruments in Latin America, Asia and Eastern Europe between 2004 and 2006. Not surprisingly, the Bank and many other agencies have welcomed the recent shift towards individual credit. They have promoted new techniques in credit scoring, payroll loans and MBSs in order to increase the access of poorer households to credit. Thus, they believe that they are helping financial markets “work for the poor”. Nowhere is this clearer than in the provision of housing for poorer households, where policy has focused on developing secondary mortgage markets to facilitate homeownership ...