A Primer on Housing Finance Reform

October 2, 2019

Project Summary

The effects of the 2008 financial crisis caused people to reassess the role of financial innovators and government regulators in the housing market. Recent research in housing and finance has helped identify underlying forces that contributed to the boom, bust, and recovery in the U.S. from 2000 to the present. This paper summarizes key findings from this literature and provides suggestions for how to increase resiliency in U.S. housing markets.

Author, Aaron Hedlund reviews the recent history of the U.S. housing market, including price patterns, construction, homeownership, and consumer credit. He notes:

  • Contrary to the traditional narrative, subprime borrowing was not the primary driver for the housing bubble. In reality, risky lending to borrowers of all backgrounds led to an over-expansion in mortgage credit.
  • The effects of the Great Recession have been highly uneven geographically and across property values.
  • During the recovery, lending has retracted to exclude low-credit debtors, but high loan-to-value and high payment-to-income loans remain the norm.
  • Homeownership in the U.S. remains low, likely due to recovered house prices but limited new construction.

Building on the “boom, bust, and recovery” narrative in the context of housing market regulation, the study discusses the potential implications of several reforms proposed in the academic literature. The author finds:

  • Underpriced mortgage backing by the federal government increases risky lending, reduces financial stability, and limits private lending.
  • Several proposed policy reforms could strengthen the U.S. housing market. These reforms include introducing greater market forces, right-sizing prudential regulations, streamlining both refinancing and foreclosure, and facilitating more significant mortgage design innovation.

Critical lessons from research on the Great Recession can guide future policy to achieve increased homeownership without undermining financial stability. This paper provides a detailed look at the boom, bust, and recovery of the housing market in the U.S. and highlights several proposed reforms that could help improve economic resilience.

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