Should US Follow UK in Keeping Strict Mortgage Loan Criteria?

A think tank in the UK recently stated that the nation’s banks should continue to maintain the tough mortgage rules in order to prevent another housing crisis in the future. The banks and lenders in the United States have also toughened up their lending criteria to prevent the same type of catastrophe that we witnessed just a few years ago. But it seems that we are slowly losing the grip on the tighter regulations. Should we be following the example of what the UK banks are doing?

In the UK, the Institute for Public Policy Research (IPPR) states that some of the restrictions on buying a home should include the following: a mortgage should be capped at 90 percent of the home’s value and borrowers should not be allowed to borrow more than the equivalent of 3.5 times their annual income. These restrictions are due to the fact that the nation has had four housing bubbles in the last four decades which has created plenty of damage for the country’s economy. The most recent housing problems, according to the IPPR, were due to loosened mortgage lending practices. This resulted in property values plummeting.

The regulations suggested by the IPPR also stated that buyers who are purchasing properties to rent to others should require a larger deposit so that the rental payments paid by the renters would be enough to pay for the monthly mortgage payments. These requirements, according to the IPPR, would prevent “small time speculators” from causing another housing bubble by looking for large profits from the “buy-to-let market,” which was one of the main reasons for the house price bubbles in previous years.

The group also said that the UK had an “addiction to house-price inflation” which is hurting the national economy and stability in housing prices is one of the best and most effective ways to prevent any further damage to the economy right now and in the future. Between 1996 and 2006, the housing prices tripled, according to the IPPR. And mortgage lending is more than 80 percent of the UK’s gross domestic product. That compares to only 73 percent in the United States, 44 percent in Western Europe and 49 percent in Canada.

Should the United States banks keep their mortgage loan terms strict like they have been? Is the UK going to be the example for us to help prevent another housing bubble? Or are the strict guidelines hurting the economy even further? Let us know your thoughts about this situation.

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