The Financialization of Home and the Mortgage Market Crisis

A brief summary of Manuel B. aalbers's The Financialization of Home and the Mortgage Market Crisis 

Mortgage markets have evolved drastically during the past century.  They have been transformed “from being a facilitation market for homeowners in need of credit to one increasingly facilitation global investment.”

The volatility of mortgage markets in recent years has been said to be on account of the correlation and relationship between homeowners and global investors and the increase of financializing and globalization of markets in general.

Another example of financialization beyond mortgage markets is pension funds. “The financialization of pension funds ties the fate of individual pension beneficiaries and workers to the fate of financial markets because capital meant for the tertiary circuit switches directly to the quaternary circuit. 

Within our society, the extraction of profit, capital as well as their accumulation is valued highly and therefore this creation of a quaternary circuit has occurred. This manifestation has further implemented financialization as well as capital switching, not just as a form of crisis prevention but for the progression of capitalism, capital-accumulation and advancement of industry.

Financialization:

The increase of finance being influential in the operations of capitalism.  This means that former industries, markets etc. that did not necessarily directly relate to financial industries now go through these financial channels in order to assure significant growth of industry and economic prosperity.  It creates the notion of financial tools such as money, credit and securities being capital and market in and of themselves.  This process also values high levels of capital accumulation.

This new process has also created a new form of competition, that further increases its progression.

Capital Switching:

When capital flows from one sector of the economy to the other, usually from the primary circuit of the economy to the secondary circuit.

Capital is used as a strategy to prevent crisis.  However, when capital switching occurs from the secondary to the quaternary (financial markets) this could cause moments of crisis due to a higher potential for unstable income sources and over accumulation.

The Capitalization of Almost Everything

The Capitalization of Almost Everything

The Future of Finance and Capitalism

Andrew Leyshon and Nigel Thrift

The text provides insight into new developments in the process of financialization. These new developments are based on real assets, the bread-and-butter income flows, which are bundled up and used as collaterals in these new investment products. These financial regionalization’s which were previously considered to be off-limits, are both cause and effect for new speculations.

Standard radical opinion on the financial system usually laments its complexity, scale and speed. All of which are seen to have dire and unintended consequences. A bulldozer on weaker and smaller investors. The text ensures to reinforce that the financial system, within the capitalist entity, must constantly reproduce and reinvent itself to survive. It must continuously find new assets that can be turned into collateral to sustain itself. Basically, all can be financialized, turned into an asset and investment if it provides a reliable and continuing income stream. That which proves to be reliable is used as collateral, so more risks can be taken. The text different shapes new collaterals and forms of investment take place. Some examples are:

Rent as Assets

Using the example of the brothers Tchenguiz, who climbed the latter to become property magnates. They treated buildings like financial instruments. Though they began their business as landlords, they began to buy buildings that were guaranteed sources of income. Those buildings were occupied by blue-chip tenants that were unlikely to vacate their homes.

This hyper capitalization is the product of an endless search for expansion.

Credit card debt

Experian and Equifax, credit-rating companies, have made new classes of risk apparent, one of them being credit card debt. A product that used to be aimed at the more affluent, this debt product has penetrated much lower income groups. The debt is securitized and due to higher interest rates, it can be used to produce higher yielding, although riskier.

University’s

In the US and UK, universities have been issuing bonds based on student income streams of various kinds (real income from halls of residence), or on a share of putative intellectual property from research income.

This hyper capitalization is the product of an endless search for expansion. These collateral have come into existence through new forms of computational detecting, through the construction of new income streams from existing portfolios, by expanding those portfolios and by identifying entirely new income streams.

The Financialization of Home and the Mortgage Market Crisis

The Financialization of Home and the Mortgage Market Crisis

Financialization can be characterized as capital switching from the primary, secondary or tertiary circuit to the quaternary circuit of capital. Housing is a central aspect of financialization.  The financialization of mortgage markets demands that not just homes but also homeowners become viewed as financially exploitable.  It is exemplified by the securitization of mortgage loans, but also by the use of credit scoring and risk-based pricing.

Financialization as Capital Switching

Financialization is arrangement of accumulation.  Profit making occurs increasingly through financial channels. This refers to the increasing role of finance in the operation of capitalism and implies  ‘the inverted relation between the financial and  the  real  is  the  key  to  understanding  new  trends  in  the  world’  (Sweezy  1995:  8).

 Mortgage Markets and Financialization

The primary mortgage market is the market where borrowers and mortgage originators come together to negotiate terms and effectuate mortgage transaction. Mortgage brokers, mortgage bankers, credit unions and banks are all part of the primary mortgage market.

After being originated in the primary mortgage market, most mortgages are sold into the secondary mortgage market. Unknown to many borrowers is that their mortgages usually end up as part of a package of mortgages that comprise a mortgage-backed security (MBS), asset-backed security (ABS) or collateralized debt obligation (CDO).

During 2015, new loans for housing purchase continued to register excellent growth. According to a survey by the Italian Banking Association which focused on 80 banks representing about 80% of the Italian market, residential loans increased on an annual basis by approximately 97%. Outstanding residential loans, after three years of slight reductions, increased by 0.7%, reaching EUR 361,8 billion. The excellent performance of the mortgage market was directly related to the improvement in demand which began in 2014, after three years of decline, driven by favourable interest rates and housing prices.

In 2015, housing transactions with a mortgage amounted to circa 193,000 units,with a rate of increase of 19.5% with respect to the previous year. The North-East had the highest increase y-o-y (+23.2%) but, in absolute terms, it was the NorthWest which had the highest number of transactions with a mortgage, equal to 36.4% of the total, followed by the Centre with 22%. The average amount of mortgages remained stable at around EUR 119,000; in particular, the majority of mortgages falls within the EUR 101,000-200,000 category (50% of new loans). Mortgages up to EUR 100,000 (from 27% to 28% of new loans) registered a slight increase.

Of particular significance, in 2015 fixed-rate mortgages represented approximately 50% of loans. With interest rates at historic lows, many families preferred not to expose themselves to the risk of future increases, choosing the certainty of a constant rate over the life of the contract. As regards maturity, in 2015 the analysis shows a decrease of mortgages with a maturity of >26 years (30%) with respect to the previous year (37%). Mortgages with a maturity within the 11-15 and the 16-20 years categories registered a slight increase. The average interest rate on short-term loans (with a maturity of <1 year) fell to 2.0%, from 2.6% at year-end 2014 while the 10-year fixed rate reduced to 2.8% (from 3.7%). The average interest rate on new residential mortgage loans decreased to circa 2.5% from the 2.8% of the previous year.