When banks entered the mortgage lending market in the 1970s, driven by the advent of securitization, homeownership rates were significantly improved. But what exactly is securitization?
In simple terms, securitization is a process where banks bundle a group of mortgages and sell them to investors, rather than keeping them on their balance sheets. Traditionally, banks fund mortgages through deposits, issuing bonds, or stock sales. In these cases, the bank is responsible for paying back investors. With securitization, the mortgages themselves are sold as standalone assets, and investors earn interest directly from the loans, not from the bank’s overall income. This reduces risk for banks while giving investors more confidence, thanks to government-backed organizations like Fannie Mae (U.S.) and CMHC (Canada) that guarantee these securities.
Securitization fueled the growth of homeownership, but it was also a big reason for the 2008 financial crisis. This was largely due to the rise of subprime mortgages—risky loans given to borrowers with poor credit. Lenders were incentivized to issue these high-risk loans because they could quickly sell them off, eliminating their own risk. This created a moral hazard, where both lenders and borrowers were less concerned with the long-term viability of the loans, leading to the housing market collapse.
While subprime loans have since been reduced, securitization remains a major force in the mortgage markets of both Canada and the U.S. Today, securitization allows lenders to offer lower interest rates, making homeownership more accessible. In Canada, mortgage-backed securities now account for 34% of the residential mortgage market, while in the U.S., it stands at 46%.
Despite its benefits, securitization hasn’t driven homeownership rates higher in recent decades, particularly for younger people. Income inequality and rising home prices have created challenges, and while new regulations emphasize a borrower’s ability to repay, further innovation is needed to address these issues. The next steps in homeownership may require bold new approaches—lessons we can perhaps learn from countries like Singapore, where homeownership rates have soared without major financial crises.
Singapore has adopted a model of shared equity, which means that, instead of buying a home on their own, buyers partner with investors to share ownership of a home. With mortgages out of reach for so many, this allows buyers to benefit from the appreciation of their home’s value without saving up for a huge down payment or needing to qualify for a large mortgage.
It’s becoming more and more apparent that banks will need to expand their offerings if more Canadians are to become homeowners. There is nothing that compares to homeownership when it comes to creating real, personal investment in a community, and for that matter, a country. As a country, we owe it to ourselves to create more amenable conditions for people to become owners of their own living spaces – even if that ownership is shared with investors.