An equity-based housing finance system completes the
market. Existing leveraged homeownership is effectively a
call option on a single house. The premium is the mortgage
payment, particularly with 0 percent down loans. All
upside reverts to the owner, and all downside to the lender.
The revised instrument removes this call option on a single
house by increasing down payments, and gives homeowners
a diversified holding across the housing market.
Responsible homeownership with an equity contribution
reduces the externality on existing owners. High returns in
the housing market come from the leveraged position of
owners, but at a risk to the lenders and the housing market.
Homeowners currently hold only one house, in a specific
area, and frequently in the same market where they earn
their wages. They are not diversified against shocks, not
spreading their risk, and are indebted.
What has been the impact of existing debt-oriented
finance programs on creating dilapidated housing in inner
city and other underserved neighborhoods? Most of these
programs focus on high leverage and minimal equity without
recourse. They encourage flipping, discourage renovation,
and create negative externalities that reduce incentives
for unleveraged homeowners to improve or repair. 4 The
alternative is gentrification, but that operates only to bring
in high-income buyers for previously distressed properties.
Gentrification leads to distortions in neighborhoods and
a resident population with limited concern about local
services such as schools.