Review of policy options

4Policy Options

At the same time, some of the tools discussed below are “tried and true” textbook examples of best mortgage lending practices and their proper and efficient implementation in a given jurisdiction is not necessarily directly related to the effects of the ongoing economic downturn in EU and US. Most mortgage policy and practice textbooks cover these topics to a great extent²¹ and the very departure from best global practices has to a significant extent exacerbated the effects of the financial crisis on ECA mortgage markets.

The distinction between measures aimed at preventing a crisis and managing one is quite useful in constructing a comprehensive housing finance policy. Specifically, it is important to note that certain measures are extraordinary, i.e. are implemented in case there is a significant and sudden negative event in the mortgage market – and may be wound down once the urgency passes. For example, various formats of “bad bank” or asset management mechanisms for defaulted or delinquent mortgage loans would not normally be used in a given country and are expected to have a defined lifecycle.

Similarly, emergency-style legislative mortgage loan servicing and special servicing measures, e.g. moratorium on foreclosure or en masse conversion of FX to LC mortgages are also effectively one-off measures aimed at relieving acute social, institutional or systemic pressure. Broadly, all emergency measures have to present a clear case of fiscal efficiencies, which is a rare global experience.

On the other hand, establishing a system for proper market information gathering and dissemination or strengthening micro and macro prudential oversight of the housing finance sector are steps that should be considered in any country developing a sustainable mortgage system.

There are of course more measures available to the authorities then the ones listed below. Among the more important ones which are not discussed in detail are the broad housing strategy and policy, particularly as they apply to the housing subsidies. Poorly conceived and implemented programs, e.g. of subsidizing the interest rate in the environment of ARM mortgages can in fact have a detrimental stability and developmental impact on the market, as well as involve significant and uncertain fiscal liabilities for the government.

Another factor in ECA mortgage systems is a likely expansion of the capital market intermediation and provision of long term funding for the mortgage lenders. In the years leading up to the crisis events of the 2009 much of the funding in many countries has been transferred by parent banks to their local branches or subsidiaries. This practice has abated in light of the EU financial turmoil. In many countries the deposits, inherently short term, constitute the prevailing funding mechanism for long term mortgages. Significant maturity gaps in these cases are a micro and a macro policy challenge for the regulators both in stability and development. In particular, absence of a robust capital market funding channel places addition pressure on the regulator in terms of prudent mortgage lending practices.

To address the current challenges of the ECA markets, the focus of the discussed policy measures is forward-looking, i.e. they are intended for increasing the resilience of the system vis-à-vis future cyclical or structural events. However, as many countries have a large systemically significant stock of poorly underwritten and risky mortgages, a detailed discussion on special servicing and portfolio management is provided.