This note brings together some of the policy lessons learnt in the creation of mortgage liquidity facilities around the world. It looks at the main benefits which can be derived from the creation of a mortgage liquidity facility and the conditions under which they can operate most effectively. The note details some of the pre-conditions necessary for the creation of a liquidity facility. There is a summary of some of the key techniques used in obtaining security over the mortgage collateral. Lastly, two important aspects that are crucial to building confidence in mortgage liquidity facilities are how they are regulated and their corporate governance. The note brings in relevant examples from liquidity facilities which have been set up as far back as 1987 (Malaysia), from developed countries (France) and from facilities still under discussion (West Africa). Overall, the note points to the valuable developmental role that mortgage liquidity facilities can play in nascent mortgage markets as an intermediary between capital markets in the primary mortgage markets. This is especially the case in markets where the mortgage lending infrastructure and environment have not developed sufficiently to allow for other more sophisticated alternatives such as securitization or covered bonds.

A Mortgage Liquidity Facility (MLF) is a financial institution designed to support long term lending activities by Primary Mortgage Lenders (PML). The core function of a MLF is to act as an intermediary between PMLs and the bond market, with the objective of providing long term funds at better rates and under better terms and conditions than PMLs might be able to obtain if acting alone. In addition, a MLF can provide temporary liquidity support to lenders through collateralized short term operations such as repurchase agreements. The need for such an institution arises because of the maturity mismatch between the liabilities and assets of PMLs. Capital market funding is an important way to overcome such mismatches, and in some cases, it can be the only route for institutions with small or no deposit bases (non-bank specialized lenders, small banks).