The Sub Prime Crisis: Implications for Emerging Markets

This paper discusses key characteristics of the U.S. sub prime mortgage boom and bust, contrasts them with emerging mortgage markets characteristics, and makes recommendations for emerging market policy makers. The crisis has raised questions about the wisdom of extending mortgage lending to low and moderate income households. However, prior to the growth of sub prime lending in the 1990's, U.S. mortgage markets already reached low and moderate-income households without taking big risks or suffering large losses. In contrast, in most emerging markets, mortgage finance is a luxury good, restricted to upper income households. As policy makers in emerging markets seek to move lenders down market, they should:

• Adopt policies that include a variety of financing methods;
• Allow for rental or purchase as a function of the household's financial capacity;
• Develop securitization as a tool in the context of well-aligned incentives and oversight.

Finally, it is possible to extend mortgage lending down market without repeating the mistakes of the sub prime boom and bust.