Financial Innovations for Housing: After the Meltdown

Nov 01, 2009

Almost four years after the housing market began tipping toward collapse, the government is still struggling with the appropriate legislative and regulatory response. Massive deleveraging is occurring among financial institutions and corporations, the capital markets are sorting out competing financing models, and America's housing finance market remains in need of serious repair.

Amid the chaos, the Milken Institute, with the participation of the U.S. Department of the Treasury, hosted a Financial Innovations Lab in October 2008 to explore the roots of the meltdown and consider how to move beyond it. The Lab brought together investors, lenders, brokers, business leaders, government officials, academics, attorneys, ratings agencies, policy advisers, nonprofit organizations, and other experts from the housing finance and capital markets.

"Financial Innovations for Housing: After the Meltdown" details the debate and fleshes out some of the solutions that came out of the Lab and follow-up conversations as this diverse group of experts considered strategies, innovations, and products to help revive and revitalize the mortgage finance market and the housing market in general.

The solutions fall into several categories:

  • Capital markets solutions: Jumpstart securitization, promote a covered bond market, and, more generally, introduce the Danish mortgage system into the United States

  • Products to support affordable home mortgages: shared equity and shared appreciation structures, down-payment assistance programs, an opt-out mortgage system, the use of loan loss reserves, and building savings into mortgage payments

  • Mechanisms to stem foreclosure and reduce its collateral damage: additional use of land banks, a lease-to-purchase mortgage product and bankruptcy modifications

  • New and alternative sources of capital: peer-to-peer lending through online platforms

    These measures would greatly contribute to rebuilding the housing finance market. Prudent application of financial innovations, supported by proper incentives, will move the market beyond the crisis and improve the system for financing homeownership.