"The US housing finance system, which has several unique features, needs to be reformed," said the IMF in its twice-yearly Global Financial Stability Report.
Four years after the US subprime mortgage crisis unleashed a global meltdown, the IMF offered up the United States as an example of what not to do.
Analyzing mortgage finance systems in 33 countries, the IMF painted a dysfunctional US model.
The United States generously subsidizes homebuying, but poorly regulates lenders, maintains financing mechanisms that are opaque and has a housing market today that is difficult for the poor to access.
According to an index developed by Fund economists, the United States is among the countries where governments intervene the most, topped only by Brazil, Singapore, India and Indonesia.
The US housing sector still has not recovered from the collapse of a price bubble in 2006 which triggered the subprime crisis as homebuyers with patchy credit began to default on payments.
For the 187-nation IMF, the fundamental problems in the US remain.
"The US housing finance system is unusual in many respects. An overhaul of important aspects of this system is needed," said the IMF, citing a fragmented regulatory structure and generous tax breaks.
"Such reforms would have a significant positive effect on the US financial system and would help bolster global financial stability," it said.
The IMF recommended three broad areas of "best practices": Enhanced regulation of mortgage lending, careful use of government participation in the housing sector and better transparency in the market for housing related securities.
The IMF offered a lukewarm assessment of the US government's housing finance reform plan proposed in February.
"While an overhaul of the housing finance system will take years to complete, US authorities need to step up their efforts now to develop and implement an appropriate action plan.
"The Washington-based institution supported the US government's plan for a progressive unwinding of the country's two mortgage finance giants, Fannie Mae and Freddie Mac.
The federal government took over the two collapsing companies in September 2008 in a bid to stabilize the financial system and agreed to pump money into them to keep them afloat.The IMF was clear in its criticism of US homeowner tax breaks, which enjoy broad support across the political spectrum.
"Apart from financial stability concerns, the US mortgage interest rate deduction is also costly -- at $104.5 billion in fiscal year 2011 it is the second-largest tax expenditure," it said, noting it had not shown a "discernible" impact on the home ownership rate.
Jan Brockmeijer, the IMF's deputy director of the monetary and capital markets department, underlined the reluctance of elected officials to address these questions.
"These are big issues, they have been recognized but they have not been dealt with. And it's not surprising that they have not been dealt with adequately, because they're very complex, politically complex in the sense of the housing market," he said at a news conference in Washington.
By The Star
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