In: Root » » Loans and mortgages
Mortgage markets are a key element in the overall functioning of the financial system, not only in relation to the depth and liquidity of markets on the funding side of banks, but in general, well-developed financial markets enhance the diversification of risk and enable an efficient allocation of savings, thus contributing to economic growth. Furthermore, international experience suggests that the impact of widespread home mortgages on the quality of housing, and urban development is demonstrated in the improvement of living standards and poverty alleviation. The outcomes would replicate the post-communist policies in Central and East European countries that have focused on growth enhancement and improving living standards. Providing the cross-section of the population with affordable home mortgage loans would serve as a means to achieve both the redistributive and growth-enhancing objectives. Widespread availability of affordable mortgages may in many ways enhance savings, promote financial market development and stimulate investment in the housing sector. Housing finance has played a significant role in the financial systems of many countries. For instance, the USA has equal to about 70% of its GDP (more than USD 7 trillion), in mortgage debt outstanding. Renaud has also accepted the effect of housing finance on the economy by stating that: 'An efficient housing finance system bestows numerous economic benefits while an inefficient one renders the economy vulnerable to crisis'. There are similarly large ratios in the USA, the UK and Denmark. The table also shows that housing finance in transition countries is at a much lower level relative to GDP, reflecting the absence of marketbased finance in these countries. In the context of financial liberalization and inflation control, growth rates for mortgage credit and financial innovation will certainly play a large role. In his Speech addressing the Annual Conference of the European Central Bank (ECB), Otmar Issing, member of the Executive Board of European Mortgage Federation, quoted the famous remark of the English politician and Chief Justice Sir Edward Coke, that 'A man's house is his castle'. He urged the mortgage lenders to help many households to realize their dream of building their castle, and thereby play a crucial role in the European financial system and economy. He maintained that: 'The remark by Sir Edward underlines the fact that housing cannot be regarded just like any other asset in the portfolio of households The decision to acquire property to make one's home (or castle), to realize this aspiration is a crucial moment for most people. In many cases, the mortgage contract that households enter into represents the single most important financial commitment and the acquired property the single most important asset in household balance sheets.
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