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Responsiveness Follows from Ecosystemic Robustness

How can housing policy be responsive to today’s urgent needs (e.g., foreclosures, a sluggish housing market, affordability, etc.) and simultaneously address long-term trends (e.g., an aging population, growth of younger households)?

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Because markets move infinitely faster than governments do, an effective ‘policy’ cannot be a monolith; it is the outcome of ecosystem resulting from multiple different programs, actors, and resource types that are constantly combining in myriad ways. For such an ecosystem to be robust, and therefore responsive, programs and resources should be introduced into the ecosystem only according to two principles:

1. Make the past pay its own cleanup bills.

At the end of Trading Places, freewheeling commodities speculators Randolph and Mortimer Duke, having bet heavily against orange future, are told that, by the rules of the very exchange they founded, “all accounts must be settled at the end of the day.” Though it shocked the Dukes, it is an ultimately sound principle – because markets can rebound and reactivate only when they have cleared, and the sooner they are cleared the better.

The collapse of housing prices for subprime-financed owned homes represents a massive loss of value all along that value chain: homeowner; originator; mortgage-holding bank; securitizer; and behind them all, the federal government, which has become the banking system’s unwilling backstop. All of these parties may have negative equity, a situation that will freeze them into economic immobility. To get them out of negative equity, everything involved has to be written down: home price, owner’s equity, value of debt, value of security. This doesn’t automatically mean rewriting principal balances, but it does mean forcing debt compression, either through foreclosure, workout, or otherwise. Don’t pump new money in to defer defaults; don’t bury the losses invisibly on a frozen balance sheet; instead recognize the defaults, then restructure, and if some parties are insolvent, close them and liquidate them with their assets going to more solvent institutions. Only in that way can the markets regain the activity that will start prices again ticking up.

2. Start regulating users so we can stop regulating tools.

Most of our affordable housing policy is predicated on the assumption, tacit everywhere and explicit in many places, that program participants cannot be trusted, so we must regulate each tool and painstakingly prescribe its use, as if we were hiring da Vinci to design our machinery and that imposing OSHA requirements on every step of his creative process.

Instead of regulating tools, regulate and license users: banks, lenders, developers, owners, and managers. After all, delivery of or receipt of government housing resources is not a right, it is a privilege that may be granted subject to conditions. Once we regulate the entities, not the individual properties, then not only do we eliminate the need for a mountain of asset-by-asset regulations, we also gain the flexibility for those entities to use pooled financing, which is larger, cheaper, and more flexible.

David A. Smith is the founder and chairman of Recap Real Estate Advisors.

Welcome to the BPC Housing Commission expert forum! This forum is intended to foster interactive and substantive discussion about pressing housing issues. Each month contributors from different parts of the housing sector will be invited to respond to a discussion topic. Guest posts will feature prominently on BPC’s website, as well as be shared regularly with Housing Commissioners to help inform their work.

Have a pressing question you’d like us to consider? Please leave it in the comments section. We encourage you and our expert bloggers to add comments, contributing to the national dialogue on solutions for the future of the housing sector.

Expert bloggers are not members of the BPC Housing Commission. Any views expressed on this forum do not necessarily represent the views of the Housing Commission, its Co-Chairs, or the Bipartisan Policy Center.

2012-03-31 00:00:00

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