We need a housing overhaul

Following up on my last post on cramdown, I want to highlight this opinion piece from the Wall Street Journal.

The author makes the point that many people in the U.S. are saying we need a banking system more like Canada’s, which is in much less trouble than our own. (What does Canada not do better than we do?):

Advocates of increased regulation of U.S. financial markets have concluded that more stringent rules governing leverage and capital ratios account for Canada’s impressive performance. They champion such measures here. In a Toronto speech earlier this year about reforming the U.S. banking system, former Fed chairman and Obama administration adviser Paul Volcker said the model he is considering “looks more like the Canadian system than it does the American system.”

But he says, we would have to re-design our approach to home ownership in this country to make the Canadian banking model viable in the U.S. It basically boils down to too many programs in the U.S. designed to promote home ownership – among them Fannie Mae/Freddie Mac, the fact that mortgages are non-recourse loans (which means a borrower can simply walk away from the house without the debts following him or her), and I would add the mortgage interest tax deduction.

I think we need to unwind our promotion of home ownership and the various structures and programs built upon that goal. It’s important to remember that along with a home often comes debt. And really, in the end, debt is not your friend. And look at all of the convolutions it’s thrown our government into and the bailouts it’s required to clean up this mess.

I’ve said before that, instead of home ownership promotion, I’d rather see an effort to boost wages. With higher wages for a greater number of people, more Americans would be able to participate in the home market, without the added burden of too much debt.

Incidentally, I also see this having positive environmental effects. A lot of environmentalists oppose “McMansions.” Well, if people were more leery to take on housing debt, the prices and scale of homes would likely decline. Other forms of property – row houses and condos – might actually become more attractive.

By the way, according to WSJ writer, national corporate culture played a big role in our current financial crisis. Check this out:

When it comes to comparing the track record of the U.S. and Canadian banking systems, it is worth noting that Canada’s regulations did not prohibit the sale or purchase of asset-backed securities. Early in this decade, Canada’s Toronto-Dominion bank was among the world’s top 10 holders of securitized assets. The decision to exit these products four to five years ago, Toronto-Dominion’s CEO Ed Clarke told me, was simple: “They became too complex. If I cannot hold them for my mother-in-law, I cannot hold them for my clients.” No regulator can compete with this standard.

Tighter leverage limits in Canada may have dimmed the incentives for its banks to pursue securitization as brashly as their American counterparts. But regulations cannot take all the credit. Even with leverage ratios held on average at 18 to 1 (versus 26 to 1 for U.S. commercial banks and up to 40 to 1 for U.S. investment banks), Canadian banks would not be as healthy as they are had they not disposed of their more problematic securitized assets four to five years ago. Nothing in Canada’s regulations banned risk-taking. Good, prudent management prevented excess.

I’m ever so glad for our Masters of the Universe.

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