A recent short paper (with Roy Lowrance) entitled The Mortgage Mess, the Press, and the Politics of Inattention presents a simple theory of the malfunctioning of U.S. housing finance policy. It highlights analogies with NASA’s doomed Space Shuttle program. Politicians, the press, and the academy are key actors in the drama, along with the wider public.
The paper has a long history. In 1997, “Housing Partnerships”, co-authored with Sewin Chan, Charles Freeman, and Joseph Tracy, proposed development of markets in housing equity. The equity proposal was further developed in: “Shared Equity Mortgages, Housing Affordability, and Homeownership,” co-authored with James Carr, Frederick Pollock and Zhong Yi Tong of the Fannie Mae Foundation; Facilitating Shared Appreciation Mortgages to Prevent Housing Crashes and Affordability Crises with Noël Cunningham, Mitchell Engler, and Frederick Pollock, Hamilton Project Discussion Paper 2008-12, with Noel, Richard and I getting practical in: “Rectifying the Tax Treatment of Shared Appreciation Mortgages.”
A key problem with the all-debt model is lack of understanding of house prices and housing returns. This documented in: “Machine Learning and the Spatial Structure of House Prices and Housing Returns”, with Sumit Chopra, John Leahy, Yann LeCun, and Trivikraman Thampy, and a paper on the AVM Cascade Industry. Even before the crash, the negative social consequences of valuation uncertainty and unpredictability were clear: “Collateral Damage: How Refinancing Constraints Exacerbate Regional Recessions,” with Charles Freeman and Joseph Tracy, Journal of Money, Credit and Banking, 496-516, 1997.
Current policies give rise to systemic risks. The Federal Housing Administration (FHA), as the leading edge of policy, continues to take incalculable risks, as Joe Tracy, Diego Aragon, and Anna Cororaton and I point out in “Reassessing FHA Risk” and “Is the FHA Creating Sustainable Homeownership?” I made the underlying point directly in Congressional Testimony in 2010 and 2011. Effective policy reform remains nowhere in sight.