Risk Allocation in Home Ownership:
Revisiting the Role of Mortgage Contract Terms
KATHERINE PORTER AND TARA TWOMEY
Home ownership is the main mechanism that American families use to build wealth1 and strongly associated with middle-class financial security and prosperity.2 Indeed, for most of the twentieth century, home ownership was touted as the “American dream.” In the twenty-first century, however, home ownership is proving for millions of families to be the American nightmare.
The current foreclosure crisis has wiped out all the increase in the home ownership rate achieved in the last decade.3 The rate is expected to fall further, with millions of families already facing foreclosure and millions more struggling with delinquent loans.4 As of 2010, nearly one in four home borrowers owed more on their mortgages than their homes were worth.5 Even before housing prices plunged, the steep run-up in mortgage debt in the years preceding the foreclosure crisis had severely eroded the net worth of American families. Between 1983 and 2007, the debt-to-equity ratio of middle-class families grew by 165 percent, with much of this change coming from increased mortgage debt.6 This loss of wealth makes home owners more vulnerable to financial distress triggered by unanticipated changes in income or expenses, such as job loss or medical bills. The plight of these families and the reverberating effects on neighborhoods, governments, and the economy are powerful reminders of the risks that accompany home ownership.7
The current crisis has sparked interest in reexamining America’s policies aimed at promoting home ownership.8 Laws as divergent as the Internal Revenue Code and the Community Reinvestment Act have been criticized for contributing to the foreclosure crisis.9 Some scholars have proposed alternate ownership structures that would unlink housing consumption and housing investment.10 Others have focused on the lawlessness of actors in the mortgage market and advocated for reforms such as the registration and licensing of mortgage brokers.11 These