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The absence of a formal government mandate to

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Unformatted text preview: the absence of a formal government mandate to encourage affordable home ownership, and the small presence (if any) of government-sponsored enterprises in mortgage markets. This may have prevented a U.S.-style race-to-the-bottom. In the aftermath of the crisis, many countries saw a tightening of mortgage lending standards, including countries that saw a smaller deterioration in standards during the run-up. In the U.S., 65% of lenders reported tightening standards, while that number was 80% in the Netherlands. The use of 100% LTV loans and limited documentation loans has essentially disappeared around the globe (both the U.S. and the U.K. featured a significant increase in such loans during the credit boom). The almost complete collapse of private-sector mortgage lending and securitization (in the non-conforming segment) was also unique to the U.S. And while similar to the U.S., the U.K. saw a 30% drop in lending during and right after the crisis, Denmark saw no drop-off in volume. Finally, another factor has affected the speed of recovery of housing markets: whether the mortgage credit boom was a purely financial phenomenon or was also accompanied by a construction boom that led to an oversupply of homes. In the U.S. and Spain, there was at least in hindsight a massive misallocation of economy’s resources to construction. The oversupply is 98 contributing to the substantial unemployment rate in Spain and the U.S. at present. It has even led the chief economist of Fannie Mae to call for tearing down some housing developments built during the boom. In contrast, there was not as much of a construction boom in the U.K. (apparently thanks to a somewhat more bureaucratic planning office). The lower inventory of housing has facilitated the house price recovery there. Hence, while house prices rocketed skyward with the easing of credit and bottomed when credit tightened, there is no shadow inventory of excess houses that would prevent the normal demand-based recovery of house prices. 7.3. “Bad Banks” – Ring Out the Old, Ring in the New! While not all countries have the misfortune of having created behemoths out of government-sponsored enterprises, many have their own share of misguided policies for federal- or municipal-owned banks and in general for the regulation of the financial sector. One of the first banks to collapse and be bailed out in the financial crisis of 2007-09 was the German Sachsen Landesbank. The bank had provided credit guarantees of more than three times its equity capital to off-balance sheet vehicles, which were funded by short-term debt and invested in long-term and illiquid credit assets. The bank was unable to fulfill promises under these guarantees and was rendered insolvent, not unlike Fannie and Freddie. Germany in fact has a large number of such regional banks (called Landesbanken), which are owned by state governments. Many of these were “bad banks” that were set up in previous crises to deal with poor quality assets. Before 2005, the Landesbanken operated with guarantees by their poor quality assets....
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