Safety in Separation: How Unbundling Emerging Mortgage Markets Benefits Borrowers, Lenders, and MBS Investors

Abstract

Residential mortgage markets in certain developing nations have grown in sophistication and complexity to the point where they now resemble the U.S. model: Instead of a single financial institution originating, servicing and holding all the risk of a mortgage loan, loan markets in Argentina, Brazil, and Mexico, for example, have begun to “unbundle” these functions. This is yielding benefits for lenders and home borrowers as well as mortgage security investors, as risks are appropriately passed on to end borrowers and new loan products are generated, among other benefits. Yet this evolution is in some cases also creating challenges for these national mortgage markets, including interest-rate, inflation, and foreign-currency risks, as well as legal hurdles for investors. This article surveys the unbundling of emerging-market mortgage markets and establishes a legal and investment framework for creating sound, home-loan and secondary mortgage-security markets.