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Misaligned Incentives and Mortgage Lending in Asia

In: Financial Sector Development in the Pacific Rim, East Asia Seminar on Economics, Volume 18

  • Richard Green
  • Roberto Mariano
  • Andrey Pavlov
  • Susan Wachter

This paper provides a conceptual basis for the price discovery potential for tradable market instruments and specifically the development of mortgage securitization in Asia and the potential dangers of such markets. Nonetheless we argue for the potential importance of securitization in Asia because of its possible role in increasing transparency of the financial sector of Asian economies. We put forth a model explaining how misaligned incentives can lead to bank generated real estate crashes and macroeconomic instability, with or without securitization under certain circumstances. We examine the banking sector’s performance in Asia compared to securitized real estate returns, to provide evidence on the contribution of misaligned incentives in the past. We discuss how the addition of liquid MBS could help to inoculate markets from the shocks arising from bank-financed mortgage lending. We conclude with a brief discussion of current MBS markets in Asia.

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This chapter was published in:
  • Takatoshi Ito & Andrew K. Rose, 2009. "Financial Sector Development in the Pacific Rim, East Asia Seminar on Economics, Volume 18," NBER Books, National Bureau of Economic Research, Inc, number ito_07-2, May.
  • This item is provided by National Bureau of Economic Research, Inc in its series NBER Chapters with number 0416.
    Handle: RePEc:nbr:nberch:0416
    Contact details of provider: Postal: National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.
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    Web page: http://www.nber.org
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    1. Unknown, 2001. "Book Review," Research Policy, Elsevier, vol. 30(2), pages 351-352, February.
    2. Koh, Winston T.H. & Mariano, Roberto S. & Pavlov, Andrey & Phang, Sock Yong & Tan, Augustine H.H. & Wachter, Susan M., 2005. "Bank lending and real estate in Asia: market optimism and asset bubbles," Journal of Asian Economics, Elsevier, vol. 15(6), pages 1103-1118, January.
    3. John Krainer & Chishen Wei, 2004. "House prices and fundamental value," FRBSF Economic Letter, Federal Reserve Bank of San Francisco, issue oct1.
    4. Unknown, 2001. "Book Review," Research Policy, Elsevier, vol. 30(1), pages 176-177, January.
    5. Franklin Allen, 2001. "Presidential Address: Do Financial Institutions Matter?," Journal of Finance, American Finance Association, vol. 56(4), pages 1165-1175, 08.
    6. William F. Sharpe, 1964. "Capital Asset Prices: A Theory Of Market Equilibrium Under Conditions Of Risk," Journal of Finance, American Finance Association, vol. 19(3), pages 425-442, 09.
    7. Winston T.H. Koh & Roberto S. Mariano & Andrey Pavlovb & Sock Yong Phang & Augustine H. H. Tan & Susan M. Wachter, 2006. "Underpriced Default Spread Exacerbates Market Crashes," Finance Working Papers 22458, East Asian Bureau of Economic Research.
    8. Richard K. Green & Susan M. Wachter, 2005. "The American Mortgage in Historical and International Context," Journal of Economic Perspectives, American Economic Association, vol. 19(4), pages 93-114, Fall.
    9. Franklin Allen & Douglas Gale, 1976. "Optimal Financial Crises," Center for Financial Institutions Working Papers 97-01, Wharton School Center for Financial Institutions, University of Pennsylvania.
    10. Jaffee, Dwight M. & Quigley, John M., 2007. "Housing Subsidies and Homeowners: What Role for Government-Sponsored Enterprises?," Berkeley Program on Housing and Urban Policy, Working Paper Series qt6g8986r5, Berkeley Program on Housing and Urban Policy.
    11. Jacob Gyntelberg & Eli M Remolona, 2006. "Securitisation in Asia and the Pacific: implications for liquidity and credit risks," BIS Quarterly Review, Bank for International Settlements, June.
    12. Karl E. Case & Robert J. Shiller, 2003. "Is There a Bubble in the Housing Market?," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 34(2), pages 299-362.
    13. Richard J. Herring & Susan Wachter, 1999. "Real Estate Booms and Banking Busts: An International Perspective," Center for Financial Institutions Working Papers 99-27, Wharton School Center for Financial Institutions, University of Pennsylvania.
    14. H. Franklin Allen & Douglas Gale, . "Innovation in Financial Services, Relationships and Risk Sharing," Center for Financial Institutions Working Papers 97-26, Wharton School Center for Financial Institutions, University of Pennsylvania.
    15. Unknown, 2001. "Book Review," Research Policy, Elsevier, vol. 30(1), pages 175-176, January.
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