Time for New Innovation in the Fractured Housing Finance System Risk Reduction Mortgages – Delivering Affordability and Diversification to Today’s Homeowner The adage, “There ain’t [sic] no such thing as a free lunch,” has long been held sacrosanct amongst economists and market participants. Within the world’s largest market – residential real estate – where all sorts of risk exists, the idea of a free lunch simply doesn’t equate. Fact is, many would argue that far from providing a free lunch, let alone real benefit, the current housing finance system is once again in disrepair and at serious risk of precipitating yet another destabilizing market crash. While the system does still work, it is fraught with problems and far from optimal for today’s homeowner. Tens of millions of existing homeowners, and those seeking to purchase, face huge challenges – diminished affordability, the prospect of paying thousands annually in exorbitant fees, the inability to diversify and protect their most valuable asset, and the potential for total investment loss through foreclosure. Fortunately, there is a solution. One that stands set to make affordability a reality for tens of millions of homeowners and those seeking to purchase. Able to provide a diversification benefit – termed “the only free lunch in Economics” – addressing home-price risk for what is typically a homeowner’s largest investment. Fractured Housing Finance Industry Affordability Today’s homebuyer is faced with challenges that can make a home purchase very difficult. Affordability and credit qualification remain major issues in the current environment. Chief obstacles include the following:
- Rising prices that have well-surpassed pre-2008 crisis levels throughout many regions of the country
- A rising rate environment that stands poised to go higher
- Still elevated credit standards and strict documentation requirements
- Stagnant wages that have substantially lagged traditional wage-growth levels
- Eliminate the need for PMI, HFA or piggy-back second mortgages for those unable to afford the standard 20-percent down payment. This equates to savings of thousands of dollars each year for the tens of millions of homeowners in this category – an estimated 70-percent of the $1.1 trillion annual purchase mortgage market. They will significantly enhance housing affordability for those within that group, especially first-time homebuyers.
- Allow homeowners to fully diversify their local home-price risk nationally. Typically their largest, most concentrated investment, homeowners will see their home equity value risk reduced substantially. They will also enjoy a similar reduction in foreclosure risk and benefit from a lower interest rate due to their reduced-risk profile. The diversification benefit will also provide a value-add that is estimated at more than 1-percent of the home value annually. This equates to more than $3,000 annually in economic benefit for a typical $300,000 home.
- Provide creditors (e.g.- GSEs) up to a 70-percent reduction in systemic credit losses.
- Substantially reduce risk and provide stability to the current housing finance system. Massive Government bailouts and other extraordinary measures, such as those instituted in the wake of the 2008 meltdown, could be altogether averted with prudent home diversification provided by RRMC’s Risk Reduction Mortgages.