The book is written by: Franklin Allen, Professor of Finance and Economics at The Wharton School, James R. Barth, Scholar in Finance at Auburn University and Senior Finance Fellow at the Milken Institute and Glenn Yago, Senior Fellow/Senior Director at the Milken Institute and founder of its Financial Innovations Labs
Some interesting points:
– As of 2005, there were 48.4 million mortgaged homes in the United States.
– Approximately 40 percent are now “underwater.”
– The price of homes has fallen more than 40 percent since a 2006 peak.
– More than 14 percent of households face foreclosure or default.
– These factors may result in “the continued threat of … a further downward spiral for neighborhoods and local and state governments that must depend on property taxes to support critical services.”
– The authors believe that the excessive amount of government control of the residential finance system is working against the housing recovery and that the United States must get its private investors re-involved in financing housing.
Taxes and Subsidies
The authors note that the United States may have to change some of the spending programs and tax expenditures of housing finance.
The Danish Model
The authors are fans of the Danish model.
In Denmark, when a lender issues a mortgage, it must sell an equivalent bond with a matching cash flow and maturity. The bonds and the mortgages it mirrors stay on the banks balance sheets. When interest rates rise and housing prices fall, a homeowner can hedge the household finances by buying the corresponding bond.
The authors believe this system helped Denmark avoid the problems in housing that the United States experienced. (It is noted that Denmark was “subjected to greater fluctuations in housing prices.”)
Fixing the Housing Market: Financial Innovations for the Future
* Milken Institute is a non profit think tank and publisher of the book in collaboration with FT Press.