In a report released today by the Canadian Centre for Policy Alternatives (CCPA), two prominent economists propose changes to U.S. and Canadian mortgage finance polices to prevent a future financial crisis.
The report is authored by Doug Peters, former Secretary of State (Finance) and former TD Bank Chief Economist, and economic consultant Arthur Donner.
“The disaster in the U.S. housing financing system has shown that the system is dysfunctional,” says Peters. “Policy makers in the U.S. will have to find substantial sources of long-term financing for housing or will have to look for some measures to shorten the term of housing mortgages.”
Among the report’s recommendations:
- In order to reduce the mismatch between mortgage lending (long-term) and borrowing (short-term), the U.S. should reduce the effective term of its mortgages from 30-40 years to the current Canadian effective mortgage term limit of five years. Canada should not, as some have argued, extend its mortgage term beyond the current five-year limit.
- Banks should be required to issue an obligation to repurchase all securitized debt instruments (including mortgages and asset-backed commercial paper) to keep them on their books and not sell them off to unregulated entities—and maintain sufficient liquidity to meet these obligations.
- Better regulation and oversight of the securitization process is needed in both Canada and the U.S.
- U.S. mortgage institutions should be offered bank-like protection and be required to meet bank-like equity and capital requirements.
“Without significant changes to the U.S. mortgage financing system, another U.S. financial crisis is an accident waiting to happen,” Donner says.
This article is a press release from the Canadian Centre for Policy Alternatives. Please find the full report attached.