Governments and their Roles in Regulating Home Purchase Financing

Governments of the world have been blamed for the mortgage debacle of 2008 but how much are they to blame? These are their roles in home purchase financing.

The purchase of a home is a large and significant purchase in virtually every developed country. Though national governments may not specifically oversee individual purchases, they do establish policies and broad laws that affect the general home buying market and establish direction for it. The national rate of home ownership is a point of note when assessing the economic status of any country. More economically mature countries generally have a greater degree of home ownership.

How Much Control is Enough?

Central banks may or may not be government entities, but regardless of their state of ownership, one of their primary roles is to establish primary interest rates used by banks and other lenders within their respective countries. Legislative involvement also influences the national government’s level of involvement in housing market of the private sector.
The United States and Singapore stand as examples of far different outcomes arising from similar initial determinations. The national governments of both nations determined in the 1960s that their respective citizenries should have a greater share of home ownership. The national government of the United States implemented changes with Freddie Mac and Fannie Mae; the national government of Singapore implemented its Provident Fund, a privatized approach to retirement savings and individual home ownership.

The bottom-line difference in outcome can be traced to the level of involvement of the national government. Whereas the federal government of the United States interjected its regulations and oversight into virtually every aspect of the home mortgage market, the national government of Singapore merely provided the framework and established the legislation requiring all citizens to save a prescribed percentage of their income in their own retirement account. Australia took a blended approach. The outcome after the worldwide recession of recent years is that the US housing market still continues to decline; Singapore’s barely noticed; Australia’s diminished in activity but not in value.

United States

Housing was relatively inexpensive in the 1960s when Lyndon Johnson launched his War on Poverty and created special attention to single-family housing. Before that time, mortgages were common but were not extended for those without solid proof of ability to repay any mortgage loan. Later, the federal government established and promoted a lower class of mortgage, one that would be guaranteed by the federal government and in which Freddie Mac or Fannie Mae would be involved in some form. Congressional leaders insisted that both agencies were in fine shape and did not need auditing. Each had been instrumental in developing and supporting the subprime mortgage market, which consisted of those who could not secure conventional mortgage loans using conventional criteria from the past.
Before the subprime mortgage market totally collapsed in 2008, the federal government was so directly involved that Freddie Mac or Fannie Mae directly held more than 50 percent of all US mortgage credit. Various types of subprime mortgages commonly were referred to as “liars’ loans,” because the applicant did not have to provide documentation of income, assets and other points of interest in determining credit approval. The mortgage uses the mortgaged property as collateral, and the value of housing had been appreciating rapidly over several years’ time. Housing value appreciated so quickly it created a bubble, however, and in keeping with the nature of bubbles it was certain to burst at some time.
The Troubled Asset Relief Program (TARP) was created to allow the federal government to purchase tarnished assets and equity from financial sector firms, most notably larger banks but also other financial assets. Government policies and involvement directly contributed not only to the failure of the market, but also to the bubble that grew within the mortgage market before it collapsed.

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    As of March 2010, 4.5 million homes either already were in foreclosure or their mortgages were 90 days behind. There were 2.82 million foreclosures in 2009 and many more in 2010. The rate of new foreclosures has slowed dramatically in 2011, but the trend still has not stopped. Further, many more homes are under water, meaning that their owners owe more on the mortgage than the house is worth in terms of market value.


    Australia’s national government provides a guiding framework to home purchasing, and it provides a one-time grant to first time home purchasers. The national government trusts the private sector to establish rules and standards that protect the interests of lenders extending mortgages to would-be home buyers.
    Australia’s mortgage lenders have a tool available to them that prevents most buyers from purchasing more house than they can afford over time. The tool is “genuine savings,” a consideration used by most Australian mortgage lenders when the borrower is seeking a loan for more than 80 percent of a property’s value. In other words, a borrower with a significant down payment in excess of 20 percent of the property’s value likely will not be subjected to the genuine savings test, but one seeking a mortgage with a smaller down payment likely will be.
    Mortgage lenders view savings as “genuine” when funds have been added to gradually over time and when potential borrowers have not withdrawn funds or deposited any inherited funds into the account. These actions can be done through another account, but not one that will be assessed according to the genuine savings criteria.
    The point with Australia’s genuine savings assessment is that though it is not a national government program, regulation or even suggestion, it is nonetheless encouraged as a means of excluding from the housing market those who financially may not be ready to take on the added costs of home ownership. The grant awards that the government makes to first-time home buyers remains only a boost and a point of encouragement, rather than a government “handout” that takes on the appearance of government-provided housing.

    What We Have Learned

    The lesson either for a potential home buyer or for a potential investor is that national policies and regulations can make all the difference in whether a nation’s housing market is attractive. Referencing tools such as Fisher Investments' Market Minder or Fisher's WordPress blog can provide insight into the balance of a nation’s housing market and government involvement in the private sector. Markets almost always will regulate themselves if left alone, a point that Singapore continually illustrates.

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