Principles for a Sustainable Homeownership Policy: More Value, Less Innovation Please

The Obama Administration’s anti-foreclosure plan has debuted to generally positive reviews. At least I like it. It has two main planks. The first strives to enable some homeowners whose home values have declined to refinance their mortgages at better terms. The second encourages mortgages servicers to modify existing loans by lowering monthly payments or writing down the principle. The plan put real money on the table, $75 billion, to make sure the servicers don’t stay on the sideline.

Like many numbers these days, it would have been hard to fathom anything on this scale just a few months ago. Today, it is apparent that something at this magnitude is required to avoid mass displacement. Of course, the plan is still reliant on the performance of the broader economy. If massive job losses persist, people will not be able to stay current on their payments even after their loans has been refinanced or modified.

The implosion of the housing finance system and the economic downturn are a poor combination. But in crisis, there is opportunity. Or as I first heard new HUD Secretary Shaun Donovan say – there is also crisis in crisis. Donovan is a rising star in the new administration and he is likely hard at work thinking about what a new housing finance system should look like? To answer this question, we should take this opportunity to get back to first principles and focus on identifying the primary elements of a sustainable housing policy.

To do so we need to recognize the distinctions between homeownership and rental housing as well as the opportunities for greater support of alternative ownership strategies like shared equity housing. Jeff Lubell and the Center for Housing Research has done some great work exploring this third way.

Each of these components deserves the attention of policymakers, but early this week I attended an event at the Center for American Progress focused on reforming the mortgage finance system.

It was refreshing to hear Michael Barr, who played a hand in crafting the Obama Plan, open the meeting by stating that housing reform must be nested with oversight of the entire financial system and now is the time when we should be thinking about what we want this system to look like. He went on to identify some principles that will be guiding the Obama team as they craft a plan for reconstructing the regulatory regime which governs financial services. And let’s be clear, the last regime failed. This failure has been expensive and debilitating, with real human costs that policymakers should not lose sight of.

Some of the Obama principles Barr identified were pedestrian in the sense that they are no-brainers. Yes, we need better systems to manage systemic risk. Our concern should be both with the safety and soundness of particular institutions as well as the entire system. Yes, we need stronger oversight and higher capital requirements. Yes, we need better transparency and accountability as a necessary component of financial regulation.

But he went on to say that we also need a new round of consumer protections that take into account how consumers make decisions and behave. More information does not necessarily lead to better outcomes. This builds on some work he recently performed for us at New America which explored the potential for incorporating more behavioral economics in how we design financial products. This in fact is one of the great frontiers of both policy and financial services.

Finally, he closed with my favorite point, which I would like to see receive more attention. We need to restore integrity and trust back into our financial system. These are basic human values that we have allowed to be driven from the marketplace. We should demand that they return.

These principles have ramifications for developing a sustainable homeownership policy. For starters, it means consumer protections have to be at the heart of the system and not an afterthought. It is essential that standards are set. If this means the housing finance system becomes a low margin business, with limited profit opportunities, so be it. Steering people into exotic mortgages that they did not need did not serve consumers. In near future, I would like to see a housing finance system that provides less “innovation” and delivers more “value” – such as that which the old standard FHA 30-year fixed mortgage provides.