The Development of a Secondary Mortgage Market and the Securitisation of Mortgages in the UK

The most established secondary market for mortgages is found in the US. The initial catalyst for the emergence of a secondary mortgage market there was a form of market imperfection associated with regulation — specifically, the need to even out regional imbalances in the supply of and demand for mortgage finance associated with regulations inhibiting inter-state banking. Historically, the slower growing North-east of the US has been a capital surplus region with savings deposits growing faster than mortgage originations. In contrast, the faster growing South and West faced a situation in which savings growth was not keeping pace with the demand for mortgage lending. Hence, the original rationale for a secondary mortgage market in the US was to move funds from the North-East to the South and West. The US secondary mortgage market expanded dramatically in the early 1980s, however, following the earnings crisis experienced by the Savings and Loan Associations and Mutual Savings Banks. This was again a product, in part, of regulation which limited the extent to which these thrift institutions could raise interest rates in line with market trends. When short-term interest rates began to rise sharply in the early 1980s the institutions found themselves holding low-yielding, fixed-rate, long-term mortgage assets.