A recent article in the Economist talked about new loan products that are currently available only overseas (Britain and Switzerland) that embody one of the ideas that talked about in The New Financial Order. pointed out that the financial industry has learned, over the last few decades, how to package up risks in many new ways to allow companies and people who are subject to those risks to sell them to other parties in a way that can be beneficial to both. Insurance (health, employment, hazard, auto) were the first examples; recent innovations like currency swaps help companies with too much exposure to currency fluctuations trade it away to others who benefit from it.
's proposals in The New Financial Order were that these innovations should be made more accessible to retail buyers to give us the ability to hedge away our excessive exposure to housing market fluctuations, trade cycles, and the risk that the industry we've accumulated a lifetime of experience in will go the way of the buggy whip. Specifically focusing on real estate, noted that while most home buyers benefit from the long-term increase in home values, a significant number of people are hurt when prices fall for short periods of times or in particular locations. Most of us would benefit by selling off a little of the upside exposure in exchange for some down-side protection.
has focused some of his effort recently in finding ways to make these kinds of markets more likely and more accessible. The introduction of housing price indexes this year at CME and HedgeStreet, among other places, is possible because helped develop reliable indexes that major players in the real estate market agree are representative of actual price changes over time. The market in these securities isn't yet liquid enough for it to make sense for an average home owner to trade away their specific exposure. Besides the markets are unfamiliar enough that few would find the markets.
The new products that the Economist talked about are designed to bridge this gap. The right time to talk to home buyers about their risks and to get them to think about the trade-offs is when they're buying or refinancing. The new products are a kind of mortgage that links the value of the loan to regional housing prices. If the market falls locally, the bank forgives a chunk of the loan; if the market rises, the bank shares the gain. This seems ideal for potential buyers who are worried about the real estate bubble. And it seems perfectly reasonable for banks and home owners to share the risk; home owners are overexposed, and banks underexposed to residential real estate. The banks are positioned to take advantage of the long term growth, and risk-averse home buyers can lay off some of their risk without giving up all chance of winning through appreciation. So far, these products are not available in the US. OTOH, according to the Economist, British home buyers aren't taking banks up on the offer yet.
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