| Abstract: | The U.S. housing finance market has not yet recovered from the housing price bubble that peaked in late 2006. Even though prices have fallen significantly, there are still problems in clearing the market. For the last few years, a group of financial economists and practitioners who are part of the Financial Management Association's Practitioner Demand Driven Academic Research Initiative (PDDARI) have been studying the collapse of the housing market and have concluded that many market participants still have insufficient (and in some cases the wrong) incentives to take actions that would help restore the market's health. In January 2012, Ben Bernanke, Chairman of the Federal Reserve Board, released a white paper that reviewed current housing market conditions and created a framework for policy analysis designed to help reestablish the health of the U.S. housing market as part of the broader effort to foster economic recovery. Using this framework as its starting point, the PDDARI group has come up with a set of proposals whose centerpiece is an “incentive‐compatible” mortgage that encourages homeowners to rebuild their home equity as an essential step to a housing recovery. By incorporating “price appreciation rights” that would provide stronger inducements for lenders or mortgage owners to make loan modifications (particularly, forgiveness of principal), the PDDARI mortgage structure could allow more homeowners to remain in their homes and avoid foreclosures and the large associated deadweight costs (as much as 40% of a home's assessed value). Additionally, the government‐sponsored enterprises, including Fannie Mae and Freddie Mac, are also in need of radical reform, and a transition toward greater private market participation would promote the long‐term health of the mortgage market. |
