IMF may make LTV caps the norm

With property market crises in Spain, Portugal, Ireland and the US bringing the respective economies to their knees, it was no surprise that the IMF’s annual Global Financial Stability report had a lot to say on international housing reform. The report, published yesterday, has recommended that nations with booming real estate markets issue loan-to-value caps on mortgage loans to stop housing debt getting out of control, and has also heavily criticised the US policy of loan underwriting adopted by federal mortgage giants Fannie Mae and Freddie Mac, which ultimately led to the country’s property market crisis.

“Higher LTV ratios are associated with higher house prices and credit growth over time”, said the report, which suggested that LTV caps by government regulators were “useful prudential tools to dampen credit and hence house price growth.” With numerous tales abounding of Spanish and Irish property investors taking out third and fourth mortgages of up to 100% finance, then finding themselves saddled with worthless assets and no way to repay, it would seem that restrictions such as these could certainly have prevented the crises in these countries from reaching the extent they did. “We thought the Spanish property market was one giant party, in which prices would always go up and up and up”, one failed investor told property portal Kyero earlier this week.

After reckless lending devastated much of the European market, a similar phenomenon now appears to be occurring in several Southern Hemisphere countries – home prices in Australia are now between four and seven times the median income of the average professional, leading to higher debt-to-equity ratios as households try to overextend themselves for mortgages, while values in the similarly high growth market of Malaysia are rising at an average 10-15 percent per year. Malaysia, meanwhile, has already taken steps to implement finance caps at a national level – the government recently introduced a 70 percent loan limit on third house financing to stop local property speculators getting carried away.

Meanwhile in the US, the IMF encouraged less rather than more government intervention in the housing industry, as the underwriting of mortgage values by federal regulators Freddie Mac and Fannie Mae was a large contributing factor to the country’s housing crisis. “The challenge will be to strike the right balance between an appropriate level of government participation and discouraging another cycle of overinvestment”, the IMF, which also encouraged the US to reduce its tax incentives for mortgage interest.