A New Policy Paradigm
Edited by Susan Wachter, Man Cho and Moon Joong Tcha
Chapter 10: Mortgage defaults and risk-based capital: post-global financial crisis development and implications for emerging markets
The housing finance institutions have a significant impact on the growth of the housing market. Various capital requirements are established by the U.S. government to ensure the financial safety and soundness of these institutions. However, the recent subprime crisis reminded us that even the seemingly most sophisticated housing finance system in the world can suddenly collapse. Since then, governments and think tanks around the world have devoted substantial effort to exploring the cause of the collapse. Many new policies and regulations with regard to capital requirements are introduced and implemented by the U.S. government in order to mitigate possible future impact of the Global Financial Crisis (GFC) to the overall economy to date. Among all the regulatory principles, some new regulation trends arise: Risk retention The Dodd-Frank report of 2010 mandates a risk-retention requirement of 5% capital reserve for all newly originated loans, except for the safest Qualified Residential Mortgages (QRM). This and similar regulations are intended to increase the responsibility of mortgage underwriters and encourage sound quality control behaviors. Counter-cyclical policies toward more stable housing and housing finance markets Previous static capital regulations tend to induce pro-cyclical market consequences. That is, banks have excess capital when the economy is good.
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