Franklin Allen - Fixing the Housing Market: Financial Innovations for the Future

Financial Innovations for the Future

Franklin Allen
James R. Barth
Glenn Yago

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2012 by Milken Institute
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Printed in the United States of America

First Printing February 2012

ISBN-10: 0-13-701160-1
ISBN-13: 978-0-13-701160-5

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Library of Congress Cataloging-in-Publication Data
Allen, Franklin, 1956
Fixing the housing market : financial innovations for the future / Franklin Allen, James R.
Barth, Glenn Yago.
p. cm.
Includes bibliographical references and index.
ISBN-13: 978-0-13-701160-5 (hardcover : alk. paper)
ISBN-10: 0-13-701160-1
1. Housing finance. 2. Global Financial Crisis, 2008-2009. I. Barth, James R. II. Yago,
Glenn. III. Title.
HD7287.55.A45 2012
332.722--dc23
2011045176

This volume is the second in our Wharton School PublishingMilken Institute Series on Financial Innovation. It is dedicated to moving beyond the residential mortgage problems in recent years and looking ahead to new financial innovation solutions for fixing housing markets. From mortgage stones in antiquity to the Homestead Act, building societies, and the emergence of secondary markets in structured-finance products that enable greater access to rental and owner-occupied housing, the requirements for financially and environmentally sustainable buildings to house residential communities is an ongoing challenge. But this is an important objective because it provides an opportunity to create shelter access, jobs, and income and wealth. Demographic factors and changes in cyclical demand have heavily influenced the matching of long-term assets and term maturities of liabilities in residential real estate since human settlement began.

In the first volume, we expressed thanks to the many pioneers of innovation, research, and practice in financial economics. Our gratitude for the thought leadership and practice in financial innovation from these practitioners and researchers applies to this volume as well. We are grateful to many individuals trying to resolve the problems of capital structure, market and regulatory failures, financial product and process engineering, and policy and program development in housing. This includes professionals from government agencies, financial institutions, capital markets, nongovernmental organizations involved in community development finance, and professionals in the housing finance and home building industry. Housing finance depends on a multidisciplinary pool of researchers in urban land use, design, finance, and economics throughout the world; these researchers contributed to our understanding and synthesis of diverse views presented here from the wealth of experience, experiment, failure, and success in building shelter and cities that help build our urban environment as we know it. Housing in the emerging markets represents the hopes and dreams of the residents of an increasingly urbanized world. Realizing those dreams of new homes requires active economic participation and access to housinga key ingredient in building bridges to a global middle class.

The expertise represented in this volume is too numerous to mention, but we would like to acknowledge those who had a particular influence on our thinking, including Alan Boyce, Shraga Biran, Lewis Ranieri, Michael Milken, Elyse Cherry, Shari Barenbach, Stuart Gabriel, Peter Linneman, Robert Edelstein, Michael Lea, Hernando de Soto, Martin Regalia, Mark Pinsky, Tina Horowitz, Lynn Yin, and Chenying Zhang. Our colleagues at the Milken Institute and the Wharton School at the University of Pennsylvania continue to provide an enthusiastic and committed intellectual environment for research on financial innovations, for which we are grateful. We are very thankful for their interest in and support for this series on applications of financial innovation that grow out of economic and financial theory and research and the ongoing practice of shelter finance represented in this volume. We would also like to acknowledge the support from the Ford Foundation and cooperation of the U.S. Department of Treasury and San Francisco Federal Reserve Bank for their participation in financial innovations labs in housing policy conducted by the Milken Institute. We are particularly grateful to Tong (Cindy) Li, Rick Palacios, Caitlin Maclean, Martha Amram, Apanard (Penny) Prabhavivadhana, Jakob Thomas, Kumiko Green, and Karen Giles for their research and production support, and to James Hankins for his editing of this book. None of the above can be held responsible for mistakes or failings of this work. Our hope is that this book will help facilitate new financial technologies that can be transferred to emerging and troubled developed markets, to improve the affordability of housing and urban revitalization and thus provide for more livable cities and regions throughout the world.

Franklin Allen is the Nippon Life Professor of Finance and Professor of Economics at the Wharton School of the University of Pennsylvania, where he has been on the faculty since 1980. A current codirector of the Wharton Financial Institutions Center, he was formerly vice dean and director of Wharton Doctoral Programs as well as executive editor of the Review of Financial Studies, one of the nations leading academic finance journals. Allen is a past president of the American Finance Association, the Western Finance Association, the Society for Financial Studies, and the Financial Intermediation Research Society. His main areas of interest are corporate finance, asset pricing, financial innovation, comparative financial systems, and financial crises. He is a coauthor, with Richard Brealey and Stewart Myers, of the eighth through tenth editions of the textbook