The Use of Mortgage-Backed Securities in International Comparative Perspective: Lessons and Insights
The secondary mortgage market in the United States has helped millions of people purchase homes over the past half century. Following the burst of the real estate bubble and the credit crisis, it is important for American policymakers not to lose sight of the importance that the secondary mortgage market has played in increasing home ownership. The financial engineering in the form of securitization that led to the success of the secondary mortgage market needs to be preserved, although it should also be reworked so that the externalization of unappreciated risk is reduced and the possibility of a large-scale financial meltdown of the kind experienced in 2008–2009 is not experienced again. In this respect, American policymakers could use ideas from other countries, where synthetic securitization is the key financial tool that has helped the secondary mortgage market to develop. Synthetic securitization offers ways of reducing default risk by integrating financial derivatives such as credit default swaps into the instrument. Such an arrangement also offers the possibility of making securitization more transparent, consequently providing investors new ways of assessing risk and reducing their reliance on credit ratings agencies, and in turn hopefully reducing the concomitant systemic risk that the widespread use of these instruments has created.