MORTGAGE LENDING

Mortgage Lending, A comparison of the differing approaches of the Hong Kong Mortgage Authority and Fannie Mae/ Freddie Mac in the securitization of Mortgage loans

Research Proposal

Outline

This research will focus on the various aspects of Mortgage Lending and different approaches of the Hong Kong Mortgage Authority and Fannie Mae/Freddie Mac in the securitization of Mortgage loans. The paper comprises of the following chapters

Introduction

Literature Review

Conclusion

Background of the Study

Overall, the mortgage market has changed from an 'under-supply' of funds in the 1970s to one of intense competition to provide mortgage finance, particularly pronounced at the peak of the last boom in 1988. Nevertheless, building societies still dominate the housing finance markets; for example, they accounted for 60 per cent of total outstanding mortgages at the end of 1990s and the start of the 2000s. The challenge from the banks is reflected in the growth of their mortgage advances which grew from £593 million in 1980 to £10 894 million at the height of the recent house price boom. To a lesser degree, growing competition has come from the centralized lenders. Yet, although these new lenders presently amount to only 7.7 per cent of outstanding mortgages, they are of particular interest because of the qualitative ways in which they are influencing the housing finance markets in Britain.

By focusing on the financing techniques of the new centralized lenders, this paper highlights the combined influence of financial risk in the development of new financial instruments and the ways in which these risks are identified and priced. These lenders, it is contended, introduced much change into the HONG KONG housing finance market chiefly due to their main funding process: that of so-called mortgage-backed securitization (MBS). This is a process which enhances the attributes of domestic mortgages so that they equate with other capital market investment media in terms of risk/return. Securities backed by domestic mortgages are sold to investors through the capital markets.

Rationale of the study

Within this 'specialist circuit of housing finance the relationship between mortgagor and lender was comparatively uncomplicated and housing finance risk was contained, more or less, within this housing related circuit. Risk, in other words, was related to the performance of the Hong Kong housing markets, whilst mortgage interest rates were shielded from wider macro-economic fluctuations by the limited competition for retail funds. The whole circuit, moreover, was 'unresponsive' to mortgagors; rates were set by lenders and not immediately responsive to other market rate changes for the lenders, this cozy environment was to change in the late 1990s.

The new mortgage suppliers, the centralized lenders, operate in two quite new ways when compared to banks and building societies. Firstly, their lending activities are financed wholly through the wholesale markets. Secondly, because of their limited asset base, they have formed the beginnings of a secondary mortgage market in the Hong Kong

All of these challenges from the banks, the specialist lenders, as well as that forced upon societies with the disintegration of their own cartel have, in different ways, significantly altered the source ...