Mortgage lending and macroprudential policy in the UK and US

Abstract

For many decades both UK and US politicians have encouraged homeownership supported by mortgage lending. Exuberant borrowing has fuelled housing booms and is central to many recent financial problems. As a consequence macroprudential policies have been developed to improve financial stability using a mixture of measures to deter excessive lending including loan-to-value and debt-to-income restrictions. This thesis considers macroprudential policymaking generally and, more specifically, this latter group of macroprudential measures. It concludes that it is unlikely that these measures can be used to any significant extent in western democracies. At its heart is their political legitimacy and the potential consequences for the institutions promulgating such policies since a major use of these limits would have a direct and very visible effect on home ownership aspirations. Further, the evidence indicates that these measures may well be ineffective. This thesis suggests that conduct of business regulatory policy and the use of mortgage affordability verification may be more effective. However, the successful employment these measures for macroprudential purposes may be hindered by the structure of UK financial services regulation. Moreover, there is a challenge in that historically, UK conduct of business regulation has often failed. Nevertheless, in the area of mortgage affordability, there may be opportunities to use innovative regulatory policies to reduce these risks going forward. Further, there may be lessons for the UK from the US’s approach of using the concept of the “qualified mortgage” and, additionally, in considering the role of sound conduct of business policies such as those are used by the US Veterans Administration. Nevertheless, the failure to build sufficient homes over the last forty years is at the heart of UK financial instability. Macroprudential policy may have the unequal task of attempting to suppress house price booms. This raises political issues and highlights the constraints on macroprudential policy with limits on its ability to influence fiscal and socio-economic policy. This thesis seeks to influence the debate on what can be done to help to ensure financial stability.