Providing Long-Term Financing for Housing: The Role of Secondary Markets

This paper reviews the role secondary markets can play in expanding the availability of funds for housing in developing countries. It introduces several different secondary market models and reviews the experiences of models in developing countries. The paper also explores the benefits of secondary markets and the obstacles that exist to their creation. In particular, it discusses the experience of Cagamas Berhad, the National Mortgage Corporation of Malaysia, that functions as liquidity facility, providing short and medium term finance and capital market access to mortgage lenders.

Some of the characteristics of Cagamas explored are:

• Purchase of fixed rate loans from lenders;
• Longer term mortgage for borrowers;
• Floating rate refinancing and issuance of corresponding securities;
• Tapping new funding agencies;
• Sustained and substantial profitability.

The paper concludes by listing various benefits of secondary market, such as:

• Increasing the availability of funds;
• Lowering the cost of mortgage credit through a more efficient allocation of risks;
• Lessening the credit risk through nationwide diversification;
• Improving the access to finance for housing by offering longer maturity and alternate mortgage;
• Enhancing the marketability of securities, reducing risk of investment and ultimately mortgage rate.