The FHA, the GSEs, private mortgage investors and mortgage servicers should be
incentivized to further assist the lower-income and minority borrowers and others who
have been victimized by fraudulent and predatory lending practices in the recent boom.
We should create, along lines advocated by Harvard Law professor Elizabeth Warren, a
Financial Product Safety Commission, patterned after the Consumer Product Safety
Commision, to deter poor lending practices in the future. Formal safeguards against the
practices and influences that generate systematic home appraisal inflation are also long
overdue in the mortgage lending industry. We should, at the same time, promote other
risk managing innovations in housing, such as home equity insurance, shared equity
mortgages, home price warranties, and down-payment-insured home mortgages. All of
these risk-management vehicles will help mitigate the severity of impact on individual
homeowners when we next encounter a boom-bust cycle in home prices.
The Financial Product safety commission might be worth a try, but I am skeptical about how effective it would actually be. It would run into exactly the same problems that regulators have faced over the past decade: how does one develop mortgages that are "safe" without shutting certain categories of people (low-FICO borrowers, the elderly) out of the housing market altogether?
Shared equity mortgages and home price warranties are ideas that have been around for a long time, but run into practical difficulties when people attempt to implement them. For instance, people in a house do not want to have to get permission from the shared equity partner to redo the kitchen.
The call for appraisal reform is long overdue, however.