Encouraging Home Ownership Research Articles

The political, regulatory, and market failures that caused the US financial crisis

PurposeThe purpose of this paper is to discuss the key regulatory, market, and political failures that led to the 2008‐2009 US financial crisis and to suggest appropriate recommendations for reform.Design/methodology/approachThe approach is to examine the underlying incentives that led to the crisis and to provide supporting data to support the hypotheses.FindingsWhile Congress was fixing the savings and loan crisis, it failed to give the regulator of Fannie Mae and Freddie Mac normal bank supervisory power. This was a political failure as Congress was using government sponsored enterprise (GSE) resources and the resources of narrow constituencies for their own advantage at the expense of the public interest. Second, in the mid‐1990s, to encourage home ownership, the Administration changed enforcement of the Community Reinvestment Act, effectively requiring banks to use flexible and innovative methods to lower bank mortgage standards to underserved areas. Crucially, this disarmed regulators and the risky mortgage standards then spread to other sectors of the market. Market failure problems ensued as banks, mortgage brokers, securitizers, credit rating agencies, and asset managers were all plagued by problems such as moral hazard or conflicts of interest.Originality/valueThe paper focuses on the political economy reasons for why Congress and US administrations provided these perverse incentives to the GSEs and banks to lower mortgage standards. It also proposes some innovative methods of improving bank regulation that address the regulatory capture problem.

‘Buy Your Home and Feel in Control’ Does Home Ownership Achieve the Empowerment of Former Tenants of Social Housing?

Encouraging home ownership is an important aim of housing policy in many countries. It is supposed to have positive effects on individual households and on society as a whole. This article focuses on the effect of home ownership on former tenants of social rented housing in the Netherlands. The central issue is whether becoming a home owner increases one 's sense of freedom and security in the home, one 's sense of control over one 's life, and one 's self-esteem. In other words, to what extent is buying a house a way of empowering individuals and households? Many Dutch housing associations are currently devising sale policies with the aim of empowering their tenants and providing more freedom of choice. We present the results of telephone surveys of 535 Dutch former tenants who bought their social rented dwelling and 602 others who decided not to buy their dwelling. The main question is: to what extent do these two groups differ in their scores on empowerment scales based on earlier research. Scales of ‘perceived control over life’, 'self-esteem' and 'housing-related empowerment' were adapted and measured among respondents of both groups. The results show that tenants who became home owners score higher on the control scale than tenants, but this difference can be explained by other background variables. Moreover, home owners score higher on the scale of housing-related empowerment, but lower on the scale of self-esteem, net of other factors.

The Political, Regulatory and Market Failures that Caused the US Financial Crisis

This paper discusses the key regulatory, market and political failures that led to the 2008-2009 United States financial crisis. While Congress was fixing the Savings and Loan crisis, it failed to give the regulator of Fannie Mae and Freddie Mac normal bank supervisory power. This was a political failure as Congress was appealing to narrow constituencies. In the mid-1990s, to encourage home ownership, the Administration changed enforcement of the Community Reinvestment Act, effectively requiring banks to lower bank mortgage standards to underserved areas. Crucially, the risky mortgage standards then spread to other sectors of the market. Market failure problems ensued as banks, mortgage brokers, securitizers, credit rating agencies, and asset managers were all plagued by problems such as moral hazard or conflicts of interest. The author explains that financial deregulation of the past three decades is unrelated to the financial crisis, and makes several recommendations for regulatory reform.

A Survey of Policies that may Increase Access to Home Ownership for Low‐Income Households

This review article presents a systematic overview of strategies that may make home ownership affordable to more low‐income households. Home ownership has been regarded as the preferred choice of tenure by most OECD countries for many decades and has often been supported with a wide range of methods that make ownership economically attractive. There are four distinct time periods of a typical “housing career”: (1) down payment accumulation stage, (2) transaction stage, (3) ownership stage and (4) selling stage. Although home ownership rates have been on the increase globally since the Second World War, recent signs indicate that this trend has been halted. However, it is argued that little is known on the actual effectiveness of most of the described policies and that a set of policies, focusing on at least the first three stages above, is needed should a government wish to encourage home ownership. Moreover, direct subsidies and grants are probably not very interesting considering the weak financial situation of most governments. Thus, selected policies would probably focus on the ability of the households to signal their characteristics and on strengthening various insurance markets so that they become open to more households at a reasonable price.

Max Rosenfeld, The Home Architect

1949 marks the beginning of a radical change in the relation between New Zealanders and their homes. The new government at that time began encouraging home ownership in opposition to the existing policy of renting state houses. In those days, one of the most influential architects in the country was Max Rosenfeld, a Czech immigrant who became known mainly through the Auckland magazine The Weekly News. Rosenfeld hadn't produced any iconic building or brought any revolutionary aesthetic style. Nevertheless his contribution to New Zealand domestic architecture was tremendous, though today he is hardly ever mentioned. This paper proposes to shed light on the work of this architect focusing on his participation in The Weekly News publication which started in 1949. For almost a decade Rosenfeld became known as the "Home Architect" following the name of his magazine column. His ideas and architectural advice became very popular and his publications inspired owners and helped builders to familiarize themselves with the Modern way of living and building. Rosenfeld is mainly quoted in reference to the popularization of New Zealand plan books, a kind of publication renowned for containing projects made to fit just about any taste, budget and site. Seen with disdain by some, those books were, nevertheless, the most efficient vehicle for the dissemination of architecture into the everyday life of ordinary Kiwis. In that sense Rosenfeld can be seen as one of the essential contributors to the modern building practice we find in New Zealand, which decisively influences the way Kiwis live today.

The future of Flemish social housing

Housing policy in Belgium and Flanders is directed mainly towards encouraging home ownership. Social housing in Flanders covers a share of 5.6% of the housing stock. This social rental sector is characterized as a safety net by some housing researchers and as a general model by others. During the 1990s and the first half of this decade social housing in Flanders became under discussion. The image of social housing that dominated then was one of increasing problems with tenants and neighbourhoods. Raising the income limits to get a better social mix was advocated by the sector and afterwards by policy as one of the solutions for these problems, meanwhile also improving the revenues of the housing associations. The political discourse however was very little supported by scientific knowledge. This contribution aims at clarifying the position of the Flemish social housing by describing the historical and regulatory context and presenting the results of the Housing Survey 2005. It dispels the misunderstanding that Flemish social housing is a residual model and explores different future models. One of the conclusions is that solving problems of the social rental sector may not occur at the cost of those who need affordable housing most.

Mortgage Market Sensitivity to Bankruptcy Modification

This paper examines the policy assumption underlying the special protection given to home mortgages in bankruptcy - namely that protecting lenders from losses in bankruptcy will encourage them to lend more and at lower rates, thus encouraging homeownership. This paper tests this policy assumption empirically using both current and historical mortgage market data. Current mortgage origination pricing, private mortgage insurance premiums, and secondary market pricing all indicate that mortgage markets are indifferent to bankruptcy modification risk. Historical mortgage pricing data from the 1980s and 1990s, when a particularly significant type of modification was permitted in almost half of federal judicial districts, also indicates that mortgage markets are largely indifferent to bankruptcy modification risk.

Tax Reform and Incentives to Encourage Owner-Occupied Housing: Analysis of the President's Tax Reform Panel Recommendation to Convert the Mortgage Interest Deduction to a Tax Credit

Public policy designed to encourage home ownership has operated primarily through the federal income tax system in the United States. With multiple incentives for home-ownership, the income tax system is the main tool by which the federal government encourages families to become home-owners and accumulate wealth in the form of real estate. Recent policy debate over reform of the tax system has questioned whether a mainstay of this system, the mortgage interest deduction (MID), is the best way to accomplish the stated objective. Last year the President's Advisory Panel on Federal Tax Reform recommended converting the MID into a 15% tax credit subject to regional caps related to median house prices, touching off a vigorous public debate on the importance of the MID. The purpose of this paper is to examine economic implications of that recommendation. We model how switching from the MID to a credit would affect housing finance choices between debt and equity and show how these changes would have changed the tax benefits for various households. Furthermore, we simulate the number of mortgage originations in 2004 (the most recent year which data is available) that would have been subject to the caps in the Panel's recommendation, and we identify the specific urban housing markets that would have been most severely affected. Finally, we conclude with policy discussion of the proposed credit alternative.

The role of state-developed housing and housing poverty in Korea

During the last 40 years, the emphasis of the public sector in Korea has been on the expansion of state-developed housing for sale rather than for rent. The government has introduced state-developed housing for sale alongside policies to encourage home ownership with a concept of 'filtering' in mind. The economic crisis of 1997 brought about an even more significant change in the ideological as well as the economic environment of housing: market forces are now regarded as of greater importance than the role of the state. The purpose of this paper is to examine the role of state-developed housing and to explore low-income housing issues. From the point of view of efficiency and also from that of equity, it is highly desirable that the state-developed housing-for-sale programme should be switched to rental housing or cooperative housing. The enabling framework should be developed as a low-income housing policy paradigm in Korea. The government alone cannot be expected to provide the necessary solution. Ther...

The Benefits of the Home Mortgage Interest Deduction

The home mortgage interest deduction creates incentives to buy more housing and to become a homeowner, and the case for the deduction rests on social benefits from housing consumption and homeownership. There is little evidence suggesting large externalities from the level of housing consumption, but there appear to be externalities from homeownership. Externalities from living around homeowners are far too small to justify the deduction. Externalities from homeownership are larger, but the home mortgage interest deduction is a particularly poor instrument for encouraging homeownership since it is targeted at the wealthy, who are almost always homeowners. The irrelevance of the deduction is supported by the time series which shows that the ownership subsidy moves with inflation and has changed significantly between 1960 and today, but the homeownership rate has been essentially constant.

The Benefits of the Home Mortgage Interest Deduction

The home mortgage interest deduction creates incentives to buy more housing and to become a homeowner, and the case for the deduction rests on social benefits from housing consumption and homeownership. There is little evidence suggesting large externalities from the level of housing consumption, but there appear to be externalities from homeownership. Externalities from living around homeowners are far too small to justify the deduction. Externalities from homeownership are larger, but the home mortgage interest deduction is a particularly poor instrument for encouraging homeownership since it is targeted at the wealthy, who are almost always homeowners. The irrelevance of the deduction is supported by the time series which shows that the ownership subsidy moves with inflation and has changed significantly between 1960 and today, but the homeownership rate has been essentially constant.

Household Debt and the Tax Reform Act of 1986

Prior to the Tax Reform Act of 1986 (TRA 86), interest paid on all types of household debt was deductible from income before the payment of taxes. In 1986, Congress changed the law to phase out the deductibility of interest over a five-year period.' Congress believed deductibility of interest an incentive to invest in durables rather than assets which produce taxable income and, therefore, an incentive to consume rather than save.... By phasing out the present deductibility of personal Congress intended to eliminate from the prior tax law a significant disincentive to (Joint Committee on Taxation [JCT], 1987 p. 263). The other goal of the provision was to raise $9.6 billion per year in tax revenue by 1991. Because Congress determined that encouraging home ownership is an important policy goal, achieved in part by providing a deduction for residential mortgage interest, it chose to retain the residential mortgage interest deduction (JCT, 1987 pp. 263-64). Thus, mortgage interest was fully deductible for interest paid on debt secured by a taxpayer's first or second residence up to his basis in the residence. The Omnibus Budget Reconciliation Act of 1987 (OBRA 87) changed the law so that interest paid was fully deductible on up to $1 million in acquisition debt and $100,000 in home equity debt.2 Debt is categorized as acquisition debt if it is used for the purchase or improvement of a home; home equity debt includes all other debt secured by a home. By keeping the mortgage interest deduction, Congress may have provided a loophole that some taxpayers could exploit. There was no restriction on the use of home equity debt, and taxpayers who owned homes could borrow against their home equity to pay for the same purchases they had previously funded with loans. Homeowners were given an incentive to shuffle their portfolios away from debt into mortgage debt. The widespread introduction of home equity lines of credit in the mid-1980's, which may have been spurred in part by the change in tax law, provided an inexpensive and flexible method for households to make this shift.3 Measuring the extent of portfolio shuffling is important for understanding whether households view mortgage and debt as close substitutes. Clearly the substitution of mortgage debt for debt undermines the goals of Congress to boost saving and increase revenue. Moreover, homeowners already have substantial tax preferences through the lack of taxes on the imputed income from housing and the preferential tax treatment of capital gains on their principal residence. The ability to use deductible mortgage debt to finance purchases provides homeowners another tax advantage relative to renters. Figure 1 plots the percentage change in * Putnam Investments, One Post Office Square, Bos on, MA 02109 (e-mail: dean_maki@putnaminv.com). This paper was completed while I was on the staff of the Board of Governors of the Federal Reserve System. Financial support from the Stanford Institute for Economic Policy Research and the Lynde and Harry Bradley Foundation is gratefully acknowledged. I would like to thank John Shoven, Orazio Attanasio, John Pencavel, Tim Bresnahan, Anne Royalty, Doug Bernheim, Al Teplin, Craig Furfine, Martha StarrMcCluer, Raphael Bostic, Len Burman, Julia Coronado, two anonymous referees, seminar participants, and the Financial Institutions Research Review Group for helpful comments. The views expressed in this paper are those of the author and do not necessarily reflect the views of Putnam Investments or the Federal Reserve Board or its staff. 1 In this paper, consumer interest refers to interest paid on loans that are not secured by a residence. 2 Under TRA 86, interest paid on qualified educational and medical debt secured by a home was also deductible, even if this debt exceeded the household's basis. This provision was not renewed in OBRA 87. Under OBRA 87, home equity debt also could not exceed the difference between the fair market value of the home and the amount of acquisition debt, even if this difference was less than $100,000. 3 Of course, homeowners can also increase their mortgage debt by taking out a traditional home equity loan, by taking cash out when refinancing their mortgage, or by taking out a larger mortgage when they Durchase a home.

The Policy Implications of Portfolio Choice in Underserved Mortgage Markets

Home ownership increases the incentive to maintain property and neighborhood, as well as decreasing the outflow of rents from low-income zones. However, these benefits are not costless to homeowners. With a mortgage comes the possibility of default, the financial demands of maintenance, a reduction in alternate investment opportunities, an increased exposure to fluctuations in local economic conditions, and a drastic reduction in the liquidity of personal wealth. Recently, policy makers have sought to increase mortgage lending in traditionally underserved markets. In this paper we consider the effects of this policy in light of the risk and return of housing and the current tax treatment of the home mortgage deduction. We find housing to be a relatively poor asset class in which to invest the bulk of family wealth. Trends in housing suggest that a large percentage of homeowners who bought and sold within a five year horizon in the United States over the last twenty years lost money on the investment. Lowering the equity required to purchase a home does little to alleviate the problem. We show that the current tax code - if anything - encourages renting over buying and gentrification of low income housing markets. If the government wishes to encourage home ownership among low income families despite the risks, then we argue that government agencies should share information about the risk and return of home ownership with its citizens. In addition, a direct subsidy through a tax credit may be both warranted and necessary to achieve the desired result.

The rise and fall of the conservatives' ‘grand design for housing’, 1951–64

When they returned to power in 1951 the Conservatives aimed to restore the dominance of the market in housing and property and by early 1953 Harold Macmillan, the Minister of Housing, had put forth a ‘grand design’ to achieve that goal by phasing out rent control, making council housing a residual social service only for those in need, and thus further encouraging home ownership. But, as the Conservatives had feared from the start, the various steps they took to achieve this goal proved unpopular. As rents and land prices rose in the property boom of the early 1960s, Conservative housing policies became widely associated with profiteering and homelessness. The Rachman scandal of 1963 put the Tories even more on the defensive and forced them to retreat from what were widely seen as the unacceptable consequences of an unrestrained market in housing and land.

Locational Perception: City Versus Suburban Home-Buying Preference

This article analyzes the importance of different factors of locational perception and how these factors impact upon home buyers' decisions to choose a certain location (city or suburb) for their purchases. The strength of these perceptions is tested using empirical data from a mail survey conducted in Philadelphia and its suburbs in the summer of 1993. Based on these findings, the author gives policy suggestions to equalize home buyers' perceptions of the city and the suburbs with the goal of encouraging home ownership within the city.

Housing-Finance Intervention and Private Incentives: Helping Minorities and the Poor

DESPITE THE PLETHORA of government programs and heated policy debates over the last several decades, little has been settled about the proper role for government in housing markets in general, and the mortgage market in particular. Government, it is argued, can play an important role in encouraging homeownership and eliminating discrimination in credit markets. Yet, hard evidence on the existence of discrimination is weak, as is the existing theoretical literature explaining discrimination in the credit market. Without an understanding of the magnitude and origin of discriminatory behavior in the marketplace, any policy response is merely a shot in the dark. Moreover, while being a minority is not synonymous with being poor, many programs designed to deal explicitly with poverty and its effect on housing market access are often shrouded with racial overtones in policy debates, further complicating discussion of their relative merits. This paper provides a survey and analysis of government interventions in the housing credit market. I We propose several possible goals behind government inter-

Defining the federal role in housing: Back to basics

The several objectives of government intervention in the housing sector and the economic rationale for them are briefly reviewed. The case for and efficiency of this intervention is then examined pursuant to two objectives—ensuring the availability of adequate and affordable housing to low-income households and encouraging homeownership. Present approaches are found wanting in both cases. The paper concludes with suggested modifications that appear to be reasonable on budgeting, efficiency, and political grounds.

Distributional Consequences of Alternative Mortgage Instruments

One of the major factors hindering the introduction of alternative mortgage instruments is the possibility of adverse consequences to certain groups of households seeking to obtain credit for homeownership. This study examines this issue through an analysis of cross‐sectional household data obtained from the 1970 Survey of Consumer Finances. Using multiple regression analysis, a series of structural demand models are derived and estimated. These models relate the probability of homeownership, levels of housing consumption, mortgage credit usage, and downpayment to income, assets, and other socioeconomic variables, to variables representing the relative price of housing and homeownership, and to certain variables representing the present value and cash flow costs of mortgage credit. Several mortgage‐related variables are found to be influential in housing demand decisions. These models are then used to simulate alternative instrument introduction. The graduated‐payment and price‐level adjusted mortgages are predicted to be superior to the current instrument of mortgage finance in encouraging homeownership, housing consumption, and the use of mortgage credit among all household classes. The standard variable‐rate mortgage, especially one tied to a short‐term interest rate, is predicted to be inferior to the standard instrument, with the most adverse impacts upon lower‐income, young, elderly, and black households.

Viewpoint

The availability of private rented housing has been declining for many years. In 1947, for example, about 60 per cent of households lived in privately rented accommodation; by 1971 this figure was down to 22 per cent. There are a number of reasons for this: notably the policy of encouraging home ownership, and the growth in public sector housing, whilst a further factor has been the impact of successive Rent Acts — in particular the iniquitous 1974 Rent Act.

Encouraging Home Ownership

The experience of one corporation's participation in the Turnkey III home ownership program for low income families is related. Effects of hurricane Camille on one project are detailed.