News Column

Government Roles in Housing Exacerbated Financial Crisis

April 6, 2011

The financial and housing crisis of the last few years was worse in countries where governments were heavily involved in the once-booming mortgage business, the International Monetary Fund (IMF) said Wednesday.

In its new housing report, the IMF singled out the United States, where government-backed mortgage lenders Fannie Mae and Freddie Mac helped drive an unhealthy credit boom in the early 2000s that later provoked a collapse of the country's housing sector.

Plunging home values sparked a wave of mortgage defaults starting in 2007 that left banks and other lenders teetering on the brink of bankruptcy, plunging the world into its worst financial crisis since the Great Depression of the 1930s.

The IMF report comes as the U.S. and many other governments are considering drastic overhauls of their mortgage markets to put their housing sectors on firmer ground and help prevent the next crisis.

"Government participation in housing finance exacerbated house price swings and amplified mortgage credit growth during the run-up to the recent crisis, particularly in advanced economies," the IMF wrote. "Countries with more government involvement also experienced deeper house price declines."

The IMF recommended a "more careful calibration of government participation," coupled with better regulation of private mortgage lenders that also contributed to the crisis by relaxing their standards for loans during the credit boom.

Source: Copyright 2011 dpa Deutsche Presse-Agentur GmbH

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