The essential role of the government is to formulate standardized regulations, provide standardized management procedures and lead the integrators to develop innovative financial products to meet different demands so as to ensure the long-term vitality of the secondary market of real estate mortgage loans.

In 2015, the People’s Bank of China (the central bank) announced that, with the duplicable experience of issuing loans secured by the pledge of credit assets in the selected provinces Shandong and Guangdong, nine more provinces and cities would be selected as the pilot zones to promote this practice. The branch offices of the central bank in these selected zones will adopt the IRB approaches of the central bank to rate the loan enterprises of the corporate financial intuitions within their respective jurisdictions, and they will include the credit assets that conform to the IRB standards in the list of eligible collateral accepted by the central bank for its relending. Moreover, real estate is not excluded from the high-quality assets that conform to those standards, so it can be seen as an important leap in the development of the secondary market of real estate mortgage loans.

There are three important phases in the development of the secondary market of the real estate mortgage loans. The first phase is to form mature markets of real estate, securities, and mortgages. The markets of real estate and securities are relatively young, however, certain amount of international finance experience on these markets have been accumulated after the global financial crises, which paves the way for their future development. Along with the steadily growing international competitiveness of China, the financial markets in China gradually grow mature and stable. Meanwhile, the establishment and the enforcement of the policy to unify the real estate registration in China has guaranteed in a real sense the property rights of the mortgaged real estate and the mortgage right relating to it, and this measure has reduced effectively the risk of creditor’s right.

The second important phase in the development of this kind of secondary market is to set up banks and insurance institutions for real estate mortgage loans. The function of the banks for real estate mortgage loans is to provide commercial banks with capital and buy the real estate mortgage-backed securities from financial institutions. I think not only are the qualifications of the enterprises rated in the pilot zones with the practice of issuing loans secured by the pledge of credit assets, but the credit rating of the banks is also implemented in these selected zones. By establishing such a rating system, institutions which have a good capital structure and a high credit reliability can be selected, and they can become financial institutions specialized in real estate finance when the conditions are right. Besides, it is also indispensable that the government establishes official and semi-official guarantee agencies and financial institutions. The function of these agencies and institutions is to provide a guarantee for real estate mortgages and to reinforce the reliability of the mortgage collection so that the credit rating of the mortgage can be enhanced.

The third important phase is to securitize the real estate mortgage loans. The securitization of real estate mortgage refers to the way that financial institutions package the mortgages that are similar in terms of loan period, interest rate and the type of the mortgaged property, into a security that investors can buy. In this process, the essential role of the government is to formulate standardized regulations, provide standardized management procedures and lead the integrators to develop innovative financial products to meet different demands so as to ensure the long-term vitality of the secondary market of real estate mortgage loans.

Along with the expanding scale of real estate mortgage loans in China, the risks are becoming more and more distinct, and to reduce the risks through the secondary market of real estate mortgages would be a pleasant choice. What’s more, such marketization and scale expansion can enable the lenders to use the capital in effect and raise the efficiency of using capital. The pilot zones’ practice of issuing loans secured by the pledge of credit assets promoted by the central bank definitely plays a crucial role in the development of the real estate market. Before the 1950s, the United States have already tried to establish insurance guarantee associations and the operating agencies of the second market. In the 1960s, Government National Mortgage Association (Ginnie Mae) was established to perform the important function of the government. In the 1970s, there were more integrators developing financial products on the secondary market, and the U.S. government was playing the role of a coordinator on the market in this process; on the one hand, the government provided guarantee or insurance of the mortgage-backed securities, thus the security and the liquidity of mortgage loans was enhanced; on the other hand, backed by the invincible economic power, the government played both the role of the buyers and the role of the sellers and regulated the capital supply on the secondary market so as to achieve its flexible regulation of the market. There is still a long way to go for the development of the secondary market of real estate mortgage loans in China, but along with the development of the economy, this market will definitely be boosted further.

(The author is a lecturer in the School of Economics and Management at Tongji University and visiting scholar in the Department of Real Estate at Robinson College of Business at Georgia State University. This article originally appeared in International Finance News: https://paper.people.com.cn/gjjrb/html/2015-12/28/content_1643412.htm)