Misaligned Incentives and Mortgage Lending in Asia

Richard Green, Roberto S. Mariano, Andrey Pavlov and Susan Wachter

in Financial Sector Development in the Pacific Rim

Published by University of Chicago Press

Published in print April 2009 | ISBN: 9780226386843
Published online February 2013 | e-ISBN: 9780226386867 | DOI:
Misaligned Incentives and Mortgage Lending in Asia

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This chapter provides a conceptual basis for the price discovery potential for tradable market instruments and specifically the development of mortgage securitization in Asia. It argues that securitization in Asia may be potentially important because it may help bring transparency to the financial sector of Asian economies. It develops a model explaining how misaligned incentives can lead to bank-generated real estate crashes and macroeconomic instability. It presents new comparative data on the banking sector's performance in Asia compared to the performance of securitized real estate returns, to provide evidence on the potential contribution of misaligned incentives to the magnitude of the declines in the real estate sector in the past. In particular, it shows that the banking sector suffers relatively low losses following a negative demand shock compared to the losses experienced by the real estate sector. The evidence suggests that the fact that banks' shares are publicly traded does not discipline the bank lending officers who are driven by origination fees and market share, and does not prevent underpriced lending.

Keywords: Asian financial markets; mortgage securitization; banking; real estate; lending

Chapter.  7921 words.  Illustrated.

Subjects: Business and Management

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