Resilient homeownership: how partnership-based finance would have prevented the 2008 US mortgage crisis
International Journal of Housing Markets and Analysis
ISSN: 1753-8270
Article publication date: 2 July 2020
Issue publication date: 1 April 2021
Abstract
Purpose
The purpose of this study is to demonstrate that the conventional mortgage system is not appropriate for household finance because it encourages equity extraction and excessive leverage during housing boom and leads to negative equity during a housing bust, a situation that translates into mortgage defaults and foreclosures. Home financing could alternatively be structured as a diminishing partnership preventing the homeowner from ever having negative equity.
Design/methodology/approach
Using Johansen’s cointegration test, the authors provide evidence of a long-run relationship between the delinquency rates, volume of refinancing and the change in house price index (HPI) during the 1994–2019 period. To unravel the short run dynamics between these variables, the authors used a Granger causality test that concludes that the volume of refinancing and the change in the HPI Granger cause default rates.
Findings
The authors provide evidence that under the current conventional mortgage system, excessive refinancing opportunities and equity extraction that are the main factors determining delinquency rates leading to a non-sustainable homeownership.
Practical implications
If mortgages were such that they do not incentivize defaults and foreclosures during a housing downturn, the recovery of the housing market always leads to capital gains. Therefore, disincentivizing refinancing and equity extraction would lead to a more sustainable homeownership.
Social implications
Households would be encouraged to pursue sustainable homeownership through a partnership-based model with long-term wealth accumulation for themselves and their heirs rather than short-term home ownership through the conventional mortgage system, leading to negative equity and defaults when the housing market slumps.
Originality/value
Policymakers ought to rethink the mortgage design by promoting partnership-based finance to protect the equity a household accumulates over a lifetime and thereby enhancing stable and sustainable homeownership.
Keywords
Acknowledgements
The author thanks three anonymous reviewers from the IJHMA for their helpful comments.
Funding: The author thanks RIT Dubai for funding this research project and three anonymous reviewers from the IJHMA for their helpful comments.
Citation
Bahlous-Boldi, M. (2021), "Resilient homeownership: how partnership-based finance would have prevented the 2008 US mortgage crisis", International Journal of Housing Markets and Analysis, Vol. 14 No. 2, pp. 283-304. https://doi.org/10.1108/IJHMA-04-2020-0045
Publisher
:Emerald Publishing Limited
Copyright © 2020, Emerald Publishing Limited