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For immediate release: June 18, 2009

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.

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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