Canada Tightens Lending Standards – Alan Greenspan Couldn’t Figure This Out 6 Years Ago

4.19.2010

Mortgage/lending reform was not needed 5 years ago to slow down the real estate market. The Federal Reserve, with its already existing powers, could have slowed down real estate speculation!

This is all that “”Easy Al” had to do – in order to control speculation in the housing market, all Alan Greenspan had to do is what the Canadian Finance Minister did 2 months ago:

Increase down payment requirements

Lower insurance amount on PMI type insurance to 95% from 100% making it more risky for the banks (not the government) to make higher leveraged loans

Require non resident homebuyers to put down 20%

Require home buyers to qualify for a 5 year fixed and 35 year amortizing table when purchasing – basically disallowing variable rate mortgages and their super low payments – just means home buyers will have to save a bit more and not have as high a debt to income ratio. ┬áRead the story on Bloomberg here:

Read Bloomberg summary here

Genius! Actually not quite, just common sense from anyone who can see when real estate prices are getting too hot. By the way, China has repeatedly ratcheted up the limits on buying real estate to slow speculation there too.

Greenspan was doing the opposite:

  • Lowering rates so that people with little income could by $500,000 dollar houses.
  • Keeping the reserve requirement low on banks so they didn’t have to have to hold a safe level of loss reserves (why not Fannie Mae guaranteed everything right?)
  • And the worst – getting on TV telling people that they should use adjustable rate mortgages to save money when interest rates were at 50 year lows (hello – you LOCK IN 50 year lows!).

He was just terrible – all these moves he could have made without new legislation. Many political leaders with unsophisticated knowledge of the financial markets, the authority of the Fed (and not to mention our Constitution – but that’s another story), think we need new regulations – ehh why not? Gives the interns something to do – but Greenspan already had the power to keep the real estate market from overheating – the problem was, I think, that he liked the spotlight – and as Bill Fleckenstein says, an “egomaniac” would never want to be looked upon as the bad guy. Interestingly, Jim Grant said the same thing – that Greenspan “has the lamentable tendency of needing to be liked” – see a short clip from a recent interview of Jim where he discusses this on my site HERE.