Global economic contraction and the decline in interbank lending, falling house prices and transactions: these economic conditions have had a profound impact on mortgage-market actors in all advanced economies—and mortgage markets in turn have produced waves that have affected the wider economy. What have these changes meant for mortgage funding in particular? This paper report results from a survey of housing experts1 in 14 developed economies. It concentrates on two aspects: how have mortgage systems responded differently to both the liquidity crisis and the more fundamental issues of increasing risk; and, how governments are addressing the problems for individual borrowers where economic and financial circumstances have changed. Changes affecting any of these categories—supplier, consumer or regulator—can affect the characteristics and effectiveness of the market. After a significant period during which mortgage funding and mortgage debt grew very rapidly in many countries, the market conditions facing lenders changed profoundly in 2007 and have worsened over the last two years. The wave of failures of banks and other financial institutions was associated with a sharp contraction in interbank lending; potential lenders judged the risk of nonpayment to be sizeable and charged punitively high-interest rates to mortgagors or simply refused to lend at any rate. In particular, those lending institutions whose funds came from wholesale markets rather than from depositors (as was traditional) could not raise funds from their normal sources and can no longer lend at the same rate or the same spread above base rates.

At the same time house prices which had equally risen rapidly have fallen across the developed world, Forecasts of future house price movements have grown steadily more pessimistic over the past year; while in early 2008 economists in many countries were predicting brief market corrections and overall price falls of 10% or less, projections are now much more gloomy. The value of collateral for existing mortgages has fallen (and is expected to fall further still), and new loans are being made against collateral whose value is expected to decline in the short to medium term. Finally in most countries, there was continued deregulation and consequent product innovation, both for consumers and especially in terms of Treasury management. The extent to which this led to changing balance sheets even in countries that had not themselves followed the derivative model only became clear when the system went into collapse in 2008.