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.