The United Kingdom and United States housing finance systems are two of the world's most efficient. Yet both systems exhibited instability during the past decade, as reflected in high rates of individual borrower and lending institution default. The difficulties stemmed primarily from the combination of macroeconomic policy instability and preexisting housing or financial market constraints. In the United Kingdom, volatility in monetary and fiscal policy interacted with constraints on housing supply and tenure choice to produce a speculative boom and bust in house prices. In the United States, constraints on mortgage contracts led to the insolvency of specialized housing lenders when there was an abrupt change in monetary policy. Three important lessons can be learned from these events. First, important linkages exist among housing markets, the housing finance system and the broader economy. Second, although liberalization benefits the financial system, it can exacerbate preexisting market distortions. Finally, the benefits of geographic diversification for housing lenders and insurers are significant.