Financial Sector Assessment a handbook, Chapter 4 Assessing Financial Structure and Financial Development, imf and World Bank, August 2005

Box 4.3 Finance of Housing
Financing residential mortgages is a key function 
of financial systems in advanced economies, there-
by accounting for a relatively high share of total 
financial assets. Traditionally, specialized mortgage 
intermediaries offering a limited range of other ser-
vices were the major players in this segment, and they 
often benefited from fiscal privileges. More recently, 
the removal of fiscal privileges and the addition of 
enhanced competition have tended to widen the 
range of originating intermediaries for mortgage lend-
ing. Those intermediaries, in turn, have increasingly 
securitized much of the mortgages that they originated 
and have sold them in the wholesale market. 
Long-term mortgages entail particular risks wheth-
er they are at fixed or floating rates. Fixed-rate mort-
gages may require high real yields or even may not be 
able to be sold in a volatile macroeconomic environ-
ment. Holders of such mortgages can face advance 
repayment risk if the general level of market rates 
falls, unless prepayment penalties can be enforced. 
Conversely, high inflation rates may shorten the 
effective duration of conventional mortgages, thus 
creating a demand for price-index-linked or other 
low-risk contracts (compare to Jaffee and Renaud 
1996).
Availability of long-term mortgage finance enhances 
the quality of housing, especially for middle-income 
households. Cross-country experience suggests that 
macroeconomic stability and financial sector policies 
are more important in ensuring such availability than 
is the general level of per capita income. Improved 
housing finance policy reaches well beyond the 
financial sector and includes measures to improve 
the supply of serviced land, building codes, adequate 
legal framework for land development and real 
estate, well-targeted subsidies for those who cannot 
afford adequate housing, and so forth. Because of 
this wide reach and because mortgage finance has 
increasingly become part of mainstream finance, a