According to a prominent Australian economist, the Australian
government should do its bit to boost the mortgage industry by following the
model adopted reported on
ABC News, the CEO of Lateral Economics Dr. Nicholas Gruen said that the
federal government can give the mortgage industry a shot in the arm by offering
mortgage insurance to not just the major banks in Australia but all other
financial institutions as well.
He said that the implicit guarantee that the government
provides to the four big banks should be explicitly provided to smaller lending
institutions as well. The big banks maintain good credit ratings and raise
credit more cost-effectively in the international markets in comparison to
their wholesale mortgage competitors owing to this implicit guarantee offered
to them by the government. Dr. Gruen said that mortgage insurance should be
sold to all lending institutions at a certain market price. This, he says, will
create fair competition among the big banks and smaller mortgage lenders.
Insurance should be issued for mortgages that have a loan-to-valuation ratio of
under 80% (considered low risk).A loans pool insured by the federal government can be sold
in the international markets after being securitized. With the explicit
guarantee, they would be regarded as safe investments. Canada, where the housing
market remains strong despite the weak economy, has this system and has
benefited from increased competition in the mortgage industry.
With such a
system in place, the private sector can take smaller loan loss risks while the
bigger risks can be taken on by the public sector against an insurance premium
as determined by the government.
