IMF Urges U.S. to Be Explicit on Housing Finance Guarantee
The U.S. should make explicit its guarantees of the housing-finance market and bring them fully onto the government balance sheet, the International Monetary Fund said in a report today.
The Washington-based agency said that “significant uncertainty and vulnerability” remain in the U.S. mortgage market, which will require government backing for securitized mortgages. It also called for the U.S. to press ahead with plans to phase out Fannie Mae and Freddie Mac, the government-backed mortgage companies that have been in conservatorship since 2008.
“The challenge will be to strike the right balance between delivering an appropriate level of government participation and discouraging another cycle of overinvestment,” the IMF said today in its Global Financial Stability Report. The fund welcomed the Obama administration’s housing-finance plan and said improvements in the U.S. housing finance system would bolster global stability.
The U.S. didn’t tackle tax deductions for mortgage interest in its housing plan, which the IMF said was a mistake. The deduction should be lowered or at least capped, IMF staff recommended in a press conference today.
“We would like to see it reduced,” said Laura Kodres, chief of the IMF’s global stability analysis division. She said any changes would need to be phased in gradually to avoid penalizing homeowners unfairly.
Housing Market
The U.S. housing market has not fully recovered from the 2008 crisis and will not heal for “at least several more years, under the best of circumstances,” U.S. Treasury Secretary Timothy F. Geithner told a Senate appropriations panel yesterday.
Purchases of new homes fell in February to the lowest level on record, Commerce Department said on March 23. Home construction is also near an all-time low, with builders recording a 479,000 annual pace last month, almost matching the record low 477,000 rate of April 2009.
Because of this weakness, the Obama administration has been loath to close down Fannie Mae and Freddie Mac overnight, even as it works with Congress on ways to avoid another housing crisis. Fannie Mae and Freddie Mac guarantee more than half of U.S. mortgages and have so far drawn $154 billion in government funds to stay afloat.
The IMF said strong house price increases go hand-in-hand with rapid growth in mortgage credit. Governments can exacerbate these price swings, such as their role in amplifying mortgage credit growth in the run-up to the recent crisis.
On a global level, the study said mortgage lenders and brokers need to improve their risk management and underwriting standards. These firms should face penalties for poor underwriting and need “enhanced” supervision, the IMF recommended.
Useful Tools
Limits on loan-to-value ratios and debt-to-income ratios could be useful tools for damping credit, if used with caution, the study said. Regulators need to be sure not push borrowers into “unregulated sectors” or take steps that would weaken their economies, the study said.
Emerging-market nations will need to consider the strength of their legal and financial infrastructures when making housing finance changes, the study said. It also said covered bonds could become an “important capital-market complement” as long as authorities consider the potential effects of such bonds on bank failures.
The IMF said the recent crisis has generated interest in “alternative” mortgage products designed to manage risk. These include shared-equity models, in which lenders and borrowers share in rising property values; so-called Islamic mortgages; and “property derivatives” or other insurance-type contracts that borrowers and households use to hedge against home price swings.
Mortgage products should be simplified and homeowners shouldn’t buy complex products they don’t understand, Kodres said. She also cautioned of risks posed by loans made in foreign currencies.
To contact the reporter on this story: Rebecca Christie in Washington at rchristie4@bloomberg.net
To contact the editor responsible for this story: Christopher Wellisz at cwellisz@bloomberg.net
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