Last month, Charles W. Calomiris of Columbia made a persuasive case for redesigning our system of housing finance in the FT:

An obvious alternative to subsidising mortgage risk is subsidising downpayments. This is the approach of Australia’s (non-means tested) housing policy, which gives A$7,000 to all first-time home buyers.
An improved variant would offer means-tested subsidies for first-time home buyers, while also phasing in increases in minimum downpayments. For example, first-time home buyers with houses worth less than a (regionally adjusted) maximum, who earn less than a maximum family income, would be eligible for a lump sum housing grant equal to the smaller of, say, $10,000 or 30 per cent of the downpayment on their home.
Minimum downpayments on all mortgages would rise by one per cent a year over 17 years to the new minimum of 20 per cent. This rising minimum should apply to all mortgages, not just those of buyers receiving explicit assistance.

Calomiris also recommends the creation of tax-favored savings accounts to help low to moderate incomes families save for a downpayment, an approach that would encourage sound housing investments. One of Calomiris’s arguments is that high loan-to-value ratios translate into homeowners who are “renters in disguise,” with only trivial stakes in their homes and neighborhoods. This strikes me as slightly unfair to renters, but I take Calomiris’s broader point. If federal intervention to promote homeownership can be justified at all, and I’m not so sure it can, it is justified by the idea of strengthening neighborhoods by giving families a real ownership stake that will make them better stewards.

Calomiris understands that encouraging deleveraging in the housing sector in a fragile economic environment is not going to go down very well politically.

Some argue that current housing distress makes it unwise to begin the process of deleveraging, but my proposed reductions in LTVs would be phased in over many years. Others will wrongly argue that we need to preserve FHA, Fannie and Freddie to assist in foreclosure mitigation; to the extent that the government wishes to subsidise the write downs of mortgage debt service to avoid foreclosures, it can do so on budget with explicit loss-sharing.
And, of course, developers will complain that deleveraging will limit the appreciation of house prices, but developers’ self-interest should not obscure the fact that improved affordability of homes is an advantage to homeowners.

As Calomiris suggests, it makes sense to ease the transition to a more stable and healthy housing market. Apart from developers, millions of American voters will scream bloody murder if we transition to policies that, to put it bluntly, will reduce the value of their most valuable asset.

But to the extent our homeownership promotion efforts are about encouraging asset-building among the non-rich, we should devote public resources towards tax-favored savings accounts that can be used for more than just downpayment. I cringe at the thought of creating a new tax-favored savings vehicle when we already have so many. Better to simplify the current tangle of savings vehicles with a single program that gives the beneficiaries wide discretion over how their savings will be used. This kind of wealth-building effort could reduce reliance on other forms of public assistance, and it would give families assets that they could pass on to their children that are more fungible than a house. A dynamic economy will see some regions flourish while others decline, and tethering people to declining regions can have ugly consequences, as we’ve seen. There is, to be sure, something profoundly unconservative about encouraging mobility in this way, but it strikes me as a reasonable price to pay for the many benefits we derive from the endless cycle of creative destruction and what Amar Bhide calls nondestructive creation.