So we start by introducing some real competition into the mortgage lending business.

First, the banks that used to do conventional mortgage lending are in bad financial shape.

But nothing about this subsidy explains the timing of the boom in housing and outlandish mortgage lending.

Germans do not see why they should be vulnerable because of poor quality mortgage lending in American inner cities.

Moreover, real estate prices might fall dramatically, in which case many households may find the value of their mortgage exceeding the value of their house.

Once they peak and begin to decline, lending conditions tighten, and banks find themselves repossessing houses whose value does not cover the value of the debt.

If that happens, a homeowner with a mortgage would see the real value of his debt rise by 10 .

Lower long term rates were also expected to reduce the cost of mortgage credit, raising the value of homes.

The dubious mortgage securities are so called mortgage backed securities.

Even so, the explosion in the quantity of collateralized debt obligations and similar securities went far beyond what was needed to sustain mortgage lending.

They have considerable flexibility, owing to a range of policy tools, including variable capital and reserve requirements and direct controls on mortgage lending terms.

Public policies to subsidize US mortgage lending have been costly, inefficient, and have encouraged excessive risk taking, which helped push the system toward crisis.

With China s mortgage lending equal to only 10 of GDP, compared to 60 70 in the Anglo Saxon countries, there is huge opportunity for growth.

To be sure, financial innovation, like lending to buyers who would not normally have qualified for mortgage loans (sub prime borrowers) also played a role.

This creates an incentive to default, which increases foreclosures and lowers the value of the mortgage backed securities on financial firms books.

As a result, one third of all American homeowners with mortgages are already underwater their mortgage debt exceeds the value of the house.

Lending in the Dark

The IMF s Lending Overhaul

In Europe, particularly Germany, a mortgage backed security ( Pfandbrief ) is an ultra safe asset, as normally banks finance no more than 60 of a house s value.

Now European countries finance 42 of IMF lending and 62 of concessional World Bank lending.

Moreover, the higher the gap between official interest rates and the higher rates on mortgage lending as a result of macro prudential restrictions, the more room there is for regulatory arbitrage.

After all, though home price inflation has slowed modestly in some countries, home prices in general are still rising in economies where macro prudential restrictions on mortgage lending are being used.

Ironically, then, the expanded access to mortgage lending that creates new homeowners in Latin America may end up protecting the region from the disaster that too loose credit created in the US.

In the UK, similarly, we have had problems with mid sized mortgage banks, and with poor commercial real estate lending by mutual building societies, as well as problems with two large banks.

The EIB should expand its lending.

Nor do existing international lending institutions.

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Mortgage banks kept some claims on their books, but sold most of them to investment banks as mortgage backed securities.

UBS had gaps in its US mortgage products.

Fourth, reform of US housing finance remains unfinished business. Public policies to subsidize US mortgage lending have been costly, inefficient, and have encouraged excessive risk taking, which helped push the system toward crisis.

Indeed, in its 2006 annual review of the US economy, the IMF was extraordinarily benign in its assessment of the risks posed by the relaxation of lending standards in the US mortgage market.

Derivatives markets for real estate should also facilitate the creation of mortgage loans that help homeowners manage risks by, say, reducing the amount owed if a home s value drops.

During Japan s lost decade, the Bank of Japan mostly bought Japanese government bonds, whereas the Fed is trying to reopen secondary markets for securitized private lending (which in the US is as important as bank lending), buying mortgage backed securities and consumer and business loans, as well as U.S. Treasury bonds.

The value of freedom. It's a value of community.

In Greenspan s words, the self interest of lending institutions would protect shareholders and the economy from lending excess.

The reversal of bank lending is staggering.

Lending, too, is being transformed by technology.

Would you mind lending me your car?

Would you mind lending me your car?

Banks are cutting lending to industrial borrowers.

Would you mind lending me your pen?

But they value things like fun. And they value creativity.