2009 News Releases

For immediate release:
June 18, 2009

Media contact:
James Hoard
Phone: (214) 922-5307
e-mail: james.hoard@dal.frb.org

Dallas Fed: Maximum Loan-to-Value Ratio Is Key Reform

DALLAS—Constraining high-risk real estate lending during credit booms should be a key aim for financial reform, according to the June issue of the Federal Reserve Bank of Dallas' Economic Letter.

Economic Letter can be found at: http://dallasfed.org/research/eclett/2009/el0904.html

In "Taming the Credit Cycle by Limiting High-Risk Lending," assistant vice president Jeffery W. Gunther contends that a maximum loan-to-value ratio—the restriction of a loan's amount to no more than a specified percentage of the underlying real estate's appraised value—would guard against the speculative borrowing that leads to credit booms.

Loan-to-value legislation most likely would have prevented, or at least dampened, the recent crisis, Gunther states.

"To move forward, reformers should review the loan-to-value guidelines for real estate lending, toughen them up where necessary and, most important, put the force of law behind them," Gunther writes.

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