Skin in the Housing Game

Recourse mortgages with significant down payments will stabilize the housing market, prevent speculative bubbles from forming, and limit taxpayer risk.

Editor’s note: this is the final installment in a series of essays about housing policy.
In the late 1980s, housing finance regulation focused on avoiding a repeat of what took place during the Savings and Loan crisis: government bailouts of institutions that had become insolvent by taking on too much interest-rate risk. Unfortunately, the new system, dominated by securitization, succumbed to the other major risk in mortgage lending, namely, house price risk.
Mortgage default risk is closely tied to the behavior of house prices. As long as house prices are not declining, mortgage defaults will be rare. If a borrower whose house has increased in value runs into financial difficulty and cannot pay the mortgage, it makes more sense for the borrower to sell the house and pocket the profit than it does to default on the mortgage.

Read more: http://www.american.com/archive/2013/january/skin-in-the-housing-game