While the root causes of market malaise are many and complex it seems generally agreed that lending money to prospective home owners at rates which start off affordable then rise significantly is a significant contributor. These are commonly called ARMs or adjustable rate mortages.
To make loans of this nature requires three things:
- A borrower is one or all of an optimist, a chancer or an idiot
- A lender who is one or all of the above
- A banking system that allows people to lend below the bank rate
It’s rather difficult to squeeze the first two out of the system but the third may be addressable. One could quite imagine a new regulation whereby the lowest lending rate for mortgages was the same as the prevailing central bank rate and that increases in the lending rate were limited to increases in the bank rate.
Add a little color by insisting that loans for real estate could only be executed in the country where the real estate was located and you have a tighter albeit not bomb proof system. In every situation there are losers. In this case the losers are the optimists (borrowers and lenders) who may turn out to be right but that loss is a small price to pay for greater stability and a return to the notion that you only get what you pay for.
A further wrinkle that sounds attractive is to ensure that loan to equity ratios on mortgages never exceed 90% and that borrowers are required to lodge 12 months of payments in an interest bearing escrow account that is activated on default.
Of course this all means that it will be hard to purchase real estate without the means to pay but that sounds OK.