The ""International Monetary Fund"":http://www.imf.org (IMF) has some pretty direct words for the American government and its handling of the U.S. housing crisis.
[IMAGE] In ""an annual report"":http://www.imf.org/external/pubs/ft/gfsr/2011/01/pdf/chap3.pdf that will be released next week, IMF says the origins of the global financial crisis can be found in the U.S. housing finance system. The agency says government participation in the U.S. housing market has been ""pervasive"" but has not yielded the expected benefits to prospective or existing homeowners.
IMF says quite bluntly in its report, ""It is clear that an overhaul is needed.""
The global organization faults tax incentives and low-income housing goals as contributing to the near collapse of the housing market in the United States.
""Government participation in the U.S. housing market includes a plethora of tax breaks and subsidies, including mortgage interest deductions at the federal level, as well as state and local property tax deductions and exclusion from capital gains taxation,"" the IMF states. ""There is also the Community Reinvestment Act that encourages U.S. depository institutions to lend in low-income neighborhoods.""
The report concludes, ""These initiatives may have promoted the purchase of more and bigger homes than would otherwise have been possible, exacerbating leverage and the severity of boom-and-bust dynamics. That said,[COLUMN_BREAK]
these subsidies predated the recent housing crisis by many years and did not change in the run-up to the subprime boom.""
The study also analyzes the impact of a number of housing finance characteristics on mortgage credit and house prices. In particular, it suggests that government participation in housing finance led to deeper swings in property values and amplified the expansion of mortgage credit during the years leading up to the recent crisis in advanced economies like the United States.
Based on its evaluation, IMF pinpoints three broad areas of best practices for stable housing finance systems: (1) enhanced risk management, underwriting standards, and supervision; (2) more careful calibration of government participation; and (3) improved alignment of incentives of participants using capital market funding.
The global agency says the Obama administration's recently released housing finance reform proposal is a ""welcome step.""
IMF stressed that reform of the U.S. housing finance system should first address current gaps in the regulatory, supervisory, and consumer protection frameworks; provide greater definition and transparency of government involvement in the housing market; reconsider the role of the housing GSEs to create a more level playing field in mortgage, while encouraging ""safe"" private-label securitization.
""Such reforms would have a significant positive effect on the U.S. financial system and would help bolster global financial stability,"" IMF stated.
The International Monetary Fund is an organization of 187 countries. It is a specialized agency of the United Nations with its own charter and governing structure.
The organization says its goal is to ""foster global monetary cooperation, secure financial stability, facilitate international trade, promote high employment and sustainable economic growth, and reduce poverty around the world.""