The Role of Collateral in Enabling Mortgage Lending
In developed financial systems, the house being purchased typically serves as collateral for the mortgage loan, making it a form of secured lending. This arrangement mitigates risk for the lender, who can repossess and sell the property if the borrower defaults on payments. Consequently, this mechanism provides the opportunity for households with low income and wealth to obtain home financing, a type of credit they would likely be denied if it were unsecured.
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