Where's the money coming from

This is how much of the mortgage market works today:

  • Borrower goes to bank
  • Bank lends to borrower
  • Bank combines (Securitisation) a large number of similar loans together (a Collateralised Debt Obligation or CDOs)
  • Bank sells the future rights to income from these loans to investors - both domestic and foreign
  • Investors borrow in Yen or Swiss Francs(interest rates 2%) and lend for mortgages in Sterling (interest rate 5%) - known as the carry trade

This is why Japanese interest rates and exchange rates are now so important. A collapse of the USD (possibly due to falling interest rates) may cause a rapid reversal of the carry trade thus making it more difficult and/or expensive to borrow money.

See also