The deregulation of the financial markets that started over two decades ago in the developed countries has led to increased house prices and loan to value ratios.
Home owners in western countries have over the last two decades steadily decreased their savings and at the same time increased the size of their mortgages and the amount of leverage used to purchase their homes.
This development has increased the financial risk for homeowners which recently became clear in the United States when prices on homes started to fall rapidly in 2007.
Due to this development Finansinspektionen in Sweden has enforced new regulation on mortgage lending making it more expensive for home owners to use high leverage ratios. Finansinspektionen is responsible for consumer protection in terms of financial products and the new regulation aims to protect mortgage borrowers.
Finansinspektionen suggests that an insurance that protects the borrower from loss could be used as an alternative to the regulation restricting the amount of leverage. Finansinspektionen also mentions the Canadian mortgage market as an example where compulsory mortgage insurances are enforced today.
Source: KTH
Author: Hunter, John | Westin, Jakob