Working Papers

‘American housing finance is the envy of the world’

Not anymore.

posted on 20 October 2010 by skirchner in Economics

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Some useful thoughts there about the GSEs. But I tend to rate diagnoses of the US housing finance woes on the basis of how well their explanations focus on factors that were not present in Australia. After all, our house prices rose much more than those in the US and we didn’t have a mortgage crisis. So proposals for ‘counter-cyclical’ LVRs and creating bigger loan-loss reserves in ‘good times’ - apparently tasks for government, he does not say - strike me as regulatory bubble-popping that he could just as easily propose for here. While his paper focusses on GSEs, he says nothing about the role of the ratings agencies and the resultant principal-agent problems that may have led to buyers of MBSs being naive to the risks they were taking on. And he doesn’t seem to disagree with the government bailing out bank bond-holders.

Clearly housing credit quality in Australia has been much higher than in the US - a point just made by Luci Ellis of the RBA. The billion dollar question is whether the absence of the GSE-type distortions and the ratings agency-related market failures here is enough to maintain the integrity of our financial system or whether more ‘counter-cyclical’ monetary or regulatory policy is required. Any thoughts, Stephen?

Posted by .(JavaScript must be enabled to view this email address)  on  10/20  at  01:09 PM

Financial institutions in Australia already do this to some extent. For all the flak Westpac has received over its above market rates, people seem to have missed the point that their mortgage book is full and they don’t want to take on any more exposure to housing, so they are sending the right price signals. The pressure for irresponsible lending comes from politicians, not financial institutions.

Posted by skirchner  on  10/20  at  01:49 PM

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