Real Estate Finance
I have long-standing interest in the housing and housing finance markets, in particular the study of mortgage default and its relationship to house values. I have been trying for many years to gather appropriate data. Much of this is now in place, thanks to a collaborative effort between researchers at NYU, the Federal Reserve Board of New York (FRBNY), and a premier data supplier, CoreLogic. We are using this data to develop next generation default models. These will be required if secondary mortgage markets are ever to recover.
A first paper on default, co-authored with Diego Aragon and Joe Tracy of FRBNY and a team of NYU colleagues, “Reassessing FHA Risk”, illustrates the failure of standard default models, and the high risk of future FHA losses. I continue research on this subject and will be able to provide an update in a few months. The systemic risk that current policies give rise to is further detailed in Housing Policy in Crisis.
Ironically, it was interest in default that spurred research on house values, given the impact they have on default incentives and default behavior. A team of us is now working to shed light on house values from both the theoretical and the computational directions. The theory, joint with John Leahy, is outlined in the page on “Indivisibilities“. The empirical work rests on a collaboration between economists and computer scientists at NYU and CoreLogic. The first fruits of this research are contained in the paper “Machine Learning and the Spatial Structure of House Prices and Housing Returns”, with Sumit Chopra, John Leahy, Yann LeCun, and Trivikraman Thampy.
My most recent work on valuation involves assessing the AVM Cascade Industry, the industry that provides the automated valuation models (AVMs) that underly most mortgage originations and refinancing decisions, as well as the best default models.
This paper was co-authored with Roy Lowrance, who was previously CTO of Reuters and is currently a Senior Research Scientist Courant Institute of Mathematical Sciences. With partners including Professors John Leahy (NYU economics), Professor Yann LeCun (Courant Institute at NYU) and Lori Ordover (Managing Director, Sales and Leasing Africa Israel USA), we recently formed Advanced Valuation Analytics Corporation to offer modeling services to the real estate and real estate finance industries. These industries could do with a fresh infusion of well-targeted analytic power, and AVAC has that in abundance.
My interest in housing finance and in default relates to my broader reformist tendencies. The book “Housing Partnerships”, co-authored with Sewin Chan, Charles Freeman, and Joseph Tracy, proposed development of markets in housing equity. The book was subtitled “Market at a Crossroads.” Unfortunately the wrong turn was taken, a road involving excessive debt and subsequent default. This path fed the subprime crisis, and policy makers continue to drive down this obvious dead-end. I have repeatedly emphasized the importance of shared equity. The article “Shared Equity Mortgages, Housing Affordability, and Homeownership,” co-authored with James Carr, Frederick Pollock and Zhong Yi Tong of the Fannie Mae Foundation is representative in this regard, as is the following Hamilton Project Discussion Paper:
Facilitating Shared Appreciation Mortgages to Prevent Housing Crashes and Affordability Crises with Noël Cunningham, Mitchell Engler, and Frederick Pollock, Hamilton Project Discussion Paper 2008-12.
Noel , Mitchell, and I followed by providing a practical guide to implementation:
“Rectifying the Tax Treatment of Shared Appreciation Mortgages.”
What can’t continue forever won’t. As the all-debt model fails, so markets in housing equity will come into existence worldwide. I hope to participate in the transition from a debt only structure to a debt and equity structure in the market for residential real estate finance. I continue to emphasize the importance of shared equity in various forums, and there are increasing signs that the proposed markets will develop in the not-too-distant future.
In addition to wanting to impact the world positively, my interest in housing finance is connected to an abstract interest in why institutions are so hard to change. Unfortunately there appear to be too many forces at play for model-building to be worthwhile at this stage. My understanding of institutional inertia is at an early formative stage, in which open exploration is of utmost importance.
RELEVANT ARTICLES
“Collateral Damage: How Refinancing Constraints Exacerbate Regional Recessions,” with Charles Freeman and Joseph Tracy, Journal of Money, Credit and Banking, 496-516, 1997.
Housing Partnerships: A New Approach to a Market at a Crossroads, with Sewin Chan, Charles Freeman and Joseph Tracy. Cambridge and London: MIT Press, 1997, pages xiv, 265.
The Reverse Mortgage Market: Problems and Prospects. In Innovations in Retirement Financing. Eds Olivia S. Mitchell, Zvi Bodie, Brett Hammond, and Steve Zeldes. Philadelphia, PA: University of Pennsylvania Press: 234-253,2002.
Machine Learning and the Spatial Structure of House Prices and Housing Returns, with Sumit Chopra, John Leahy, Yann LeCun, and Trivikraman Thampy, mimeo. 2008.
Facilitating Shared Appreciation Mortgages to Prevent Housing Crashes and Affordability Crises, with Noël Cunningham, Mitchell Engler, and Frederick Pollock, Hamilton Project Discussion Paper 2008-12.
“Home Equity Insurance: A Pilot Project”, with Goetzmann, William N., Hangen, Eric, Nalebuff, Barry J., Prentice, Elisabeth, Rodkin, John, Spiegel, Matthew I. and Skinner,Tom, in Housing Markets and the Economy, Eds. E. Glaeser and J. Quigley, Lincoln Press, 2009.
Shared Equity Mortgages, Housing Affordability, and Homeownership, with James Carr, Frederick Pollock, and Zhong Yi Tong, Housing Policy Debate, vol. 18, 209-242, 2007.
“Rectifying the Tax Treatment of Shared Appreciation Mortgages,” with Noel Cunningham and Mitchell Engler, Tax Law Review, vol. 62, 505-538.
“Reassessing FHA Risk.” With Diego Aragon, Sumit Chopra, John Leahy, Yann LeCun, Marco Scoffier, and Joseph Tracy. NBER Working Paper 15802. 2010.
“The AVM Cascade Industry.” With Roy Lowrance, October 2010.