Review of policy options

5 Annex 1 - Country Cases

The countries selected include the United States where the recent crisis in part had its origins, United Kingdom as a major economy with a developed housing financial system, Australia where the impact of crisis was less severe, and Korea which represents an example of Asian housing markets.

Additional examples from Russia, Serbia and Ukraine illustrate particular challenges that the markets faced in the last 5 years and key measures that the regulators and other stakeholders implemented.

5.1United States

During the Great Depression of 1930s, hundreds of thousands of homeowners defaulted on mortgages, and thousands of mortgage lending institutions failed. In response to these calamities, the federal government intervened in the housing finance system. The Federal Home Loan Bank System was created to provide a source of loans for mortgage lenders, and the Home Owners’ Loan Corporation (HOLC), to purchase delinquent loans from their originators. The HOLC purchased some one million loans, which it refinanced as long-term, fixed-rate, amortizing loans payable in monthly installments. However, the HOLC refused many loans on the grounds that the borrower lacked the income to make loan payments. Arguably, the HOLC was highly successful, however, the lessons somewhat limited because of rather different conditions⁴¹. In addition, there were many actions, programs, enactment of new legislation to provide relief to mortgage and housing markets.

During the recent crisis the housing values have declined at a rate not seen since the Great Depression, and the crisis has affected other countries around the world. The U.S. government response included support to communities facing financial problems as a result of the crisis and addressed gaps in the regulatory, supervisory, and consumer protection frameworks.

In order to support the housing market and assist those with mortgage payment problems it expanded the scope of Community Reinvestment Act regulation and introduced programs to promote sustainable loan modifications. To improve the regulatory and supervisory aspects issued tighter real estate evaluation and appraisal guidelines, enhanced disclosures for home mortgage transactions, and adopted policies to support prudent commercial real estate loan workouts. Finally, an independent Consumer Financial Protection Bureau was created to better protect the consumer facing complex risks. From a general macroeconomic perspective, the Federal Reserve provided support to the markets by purchasing unprecedented amounts of agency mortgage backed securities to reduce the cost and increase the availability of mortgage credit, further, injected capital and placed Fannie Mae and Freddie Mac in conservatorship⁴².

These policies helped avert a deeper economic collapse and a more severe housing crisis. However, the housing market remains fragile and will take years to fully recover. An elevated unemployment rate, lower household wealth, and higher credit standards are constraining demand for housing. Also, the large inventory of unsold homes, will take an extended period to work through the system⁴³. As a result of both supply and demand factors home prices still remain weak although there are signs of recovery.

5.2United Kingdom

Indirect policy support included the government’s temporary exemption on stamp duty for purchases of properties and the agreement reached between the government and several failing banks to expand mortgage lending and greater leniency in foreclosures as a condition of the bank rescue (Northern Rock, Royal Bank of Scotland, and Lloyds TSB)⁴⁴.

Furthermore, policies directed at increasing new lending included general macroeconomic policies such as the drastic reduction in base rates, and large-scale quantitative easing by the Bank of England.

In addition, the UK government responded with a package of measures to tighten mortgage regulation and to enhance consumer protection in the mortgage market. The Financial Service Authority was given regulatory responsibility for the residential mortgage market, transferring some responsibilities from the office of fair trading⁴⁵.

These measures had their impact in housing markets which appears to have bottomed out, the UK has seen a lower number of foreclosures, and there is a slow improvement in housing market activity.