"Innovative Approaches to Reducing the Costs of Home Ownership"
(A Report Commissioned by the 2003 Prime Minister’s Home Ownership Task Force) by Christopher R.E. Joye, Andrew Caplin, Peter Butt, Edward Glaeser and Michael Kuczynski

Abstract
At the heart of this initiative lies the same conception with which we started. Simply stated, it is beyond time for capitalism to develop a more human face. For centuries now, businesses in need of funds have been able to avail themselves of both debt and equity. Yet for households who aspire to expand, mortgage finance has been their one and only option. And so, despite the ever-growing sophistication of corporate capital markets, consumers around the world are forced to use only the crudest of financial instruments. In our minds at least, the immature state of Australia’s system of housing finance, and indeed those around the globe, is absolutely scandalous. The implications of these deficiencies vary from the merely inconvenient to the extremely tragic. Suffice to say that many of the severe economic complications that manifest throughout the course of a dweller’s life-cycle can be attributed to the all-or-nothing constraint on home ownership.

» Click here to download complete document

 

"Equity Finance for Home Owners: The Next Revolution in Housing Finance?"
(A paper prepared for a Fannie Mae Foundation seminar, October 2003) by Christopher R.E. Joye, Andrew Caplin, and Adam Gordon

Abstract
Housing finance markets are notoriously slow to change. The options faced by U.S. homebuyers today are practically identical to those that were available twenty-five years ago. What of the next twenty-five years? Are we to expect only minor changes in market structure into the indefinite future, or is there something more exciting on the horizon? In this paper we make the case that change is on the way. We believe that the U.S. is on the threshold of change in its system of housing finance on a scale not seen since the 1930’s and 1940’s, the period in which the foundations of the current housing finance system were put in place. After a few decades of "business as usual", there are hints that revolutionary change is about to begin in the area of housing finance. The changes that we foresee are based on one simple yet fundamental gap in the current housing finance market. There is a "missing market" in housing equity. When corporations raise money, they select an appropriate mix of debt and equity finance. Yet no equity options are available to homebuyers, who must as a result take upon themselves the great cost and concomitant financial risk associated with 100% debt finance. The economic rationale underlying equity finance markets for homeowners is presented in section 2. In technical terms, we identify the vast gains from trade to which their existence would give rise, as stressed by Caplin, Joye, Butt, Glaeser, and Kuczynski [2003]. Arguments framed in terms of gains from trade may work well with economists, but often leave others cold. In section 3 we take the crucial step of identifying the human element in the gains from trade. We argue that markets in housing equity would help ameliorate some of the most profound problems of the current housing market. Most importantly, these markets promise to make housing more affordable for first-time buyers, and thereby to boost the rate of home ownership. Opening up markets in housing equity would not only allow many renters to make the immediate move to ownership, but would also offer crucial benefits to those at the beginning of the process, trying to save assets for an eventual home purchase. For this group, markets in housing equity provide a method to invest in real estate assets prior to actually purchasing a home, thereby ensuring that first- time buyers do not lose ground to advancing house prices as they try to scrape together the necessary funds for a down payment. The findings in sections 2 and 3 raise the obvious question: "if these markets are such a good idea, how come they’re not here already?" Section 4 provides a detailed answer to this question, highlighting the various institutional barriers to market development in the U.S. These barriers include: the absence of national standards that overcome profoundly divergent approaches to mortgage laws in different states; uncertainty about the status of the home mortgage interest deduction for equity finance products; and uncertainty concerning the applicability of laws regulating maximum interest rates.

» Click here to download complete document

 

"AussieMac: A Policy Initiative for the Australian Government to Protect Households and the Financial System Against Current and Future Credit Crises" by Christopher R.E. Joye and Joshua S. Gans

Executive Summary
There is a new global financial crisis emerging caused by the collapse of sub-prime lending in the United States. As with previous capital market dislocations, Australia has not been insulated from the instability. The ‘primary’ market for residential mortgage-backed securities in Australia has for all intents and purposes evaporated. The consequence of this is that smaller banks, building societies and non-bank lenders that used the process of securitisation to provide housing finance over the last decade have either severely rationed credit or withdrawn from the market altogether. As a result, the Big-5 banks have dramatically increased their share of the mortgage market, albeit at the cost of acute balance sheet pressures. Australia needs a policy solution that will guarantee the provision of the ‘public goods’ of a minimum level of liquidity and price discovery in the mortgage-backed securities market during future financial crises. Failure to act with a systematic policy response will see the heightened competition that emerged in the mortgage market over the past 10 years significantly dissipate with a likely further casualty being the low home loan margins that households have enjoyed during this period. In such an environment, home owners and businesses may not receive the full benefit of attempts by the Reserve Bank of Australia to reduce interest rates. We propose that the Commonwealth Government sponsor an enterprise – ‘AussieMac’ – that would leverage the Government’s AAA-rating to issue low-cost bonds and acquire high-quality mortgage-backed securities from Australian lenders just as Fannie Mae and Freddie Mac have done in the United States (and the CMHC in Canada). AussieMac’s role as a long-term liquidity provider would be especially important during periods of capital market failure when third-party funding for Australian home loans can disappear with potentially dire ramifications for the financial system. While this enterprise would have to be closely monitored and controlled, it would not constitute a significant near-term drain on public funds. Instead, it would restore stability and longterm confidence to both the primary and secondary mortgage markets in Australia and ensure that the vigorous level of competition that has characterised the housing finance industry will continue into the future.

» Click here to download complete document