This Federal Housing Finance Agency (FHFA) report fulfills the requirement of Section
1602 of the Housing and Economic Recovery Act of 2008 that FHFA conduct a study of
ways to improve the overall default risk evaluation used with respect to residential
mortgage loans and report to Congress on the results of that study. To aid in the
preparation of the report, FHFA and the Federal Deposit Insurance Corporation’s
(FDIC’s) Center for Financial Research jointly selected seven papers for a public
symposium held on September 16th, 2009. This report summarizes and evaluates those
papers in the context of previous research and the comments provided by discussants at
that symposium. The appendices to the report provide the papers themselves.
FHFA is grateful to the FDIC’s Center for Financial Research and its director, Paul
Kupiec, for co-sponsoring the September 2009 symposium. FHFA also gratefully
acknowledges the contribution of Professor John Quigley of the University of California,
Berkeley to the preparation of the report.

Open source collaborations are increasingly among commercial firms whose interest is profit. Why would profit-motivated firms voluntarily share code? One reason is that cost reductions can outweigh increases in rivalry. This is especially persuasive when the contributors make complementary products. However, cost reductions do not explain why open source is a more profitable way of sharing than other forms of licensing. Why would firms use an inflexible contract like the GPL? I present a model that shows how open source licensing can lead to higher industrywide profit than would result if a first innovator could choose the most profitable license once it finds itself in the position of first innovator. From behind a veil of ignorance, that is, not knowing which firm will be first, open source licensing creates higher expected profit for the industry as a whole, and thus for each firm, than if first innovators were allowed to choose.

Studies of the “stated preferences” of households generally report public and political opposition by urban commuters to congestion pricing. It is thought that this opposition inhibits or precludes tolls and pricing systems that would enhance efficiency in the use of scarce roadways. This paper analyzes the only case in which road pricing was decided by a citizen referendum on the basis of experience with a specific pricing system. The city of Stockholm introduced a toll system for seven months in 2006, after which citizens voted on its permanent adoption. We match precinct voting records to citizen commute times and costs by traffic zone, and we analyze patterns of voting in response to economic and political incentives. We document political and ideological incentives for citizen choice, but we also find that the pattern of time savings and incremental costs exerts a powerful influence on voting behavior. In this instance, at least, citizen voters behave as if they value commute time highly. When they have experienced first-hand the out-of-pocket costs and time-savings of a specific pricing scheme, they are prepared to adopt freely policies which reduce congestion on urban motorways.

Property markets have always been cyclical, and many economists have explored
the causes and consequences of cyclicality in housing and commercial real estate.
Indeed, for more than a half century after the great depression, the National Bureau
of Economic Research (NBER) regularly explored linkages among real estate investment, mortgage credit, and aggregate business cycles (see, e.g., NBER volumes by Wickens and Foster 1937; Blank 1954; Abramovitz 1964; Zarnowitz 1992). The
regular boom and bust cycles in real property were important in their own right,
but also as key components of the aggregate business cycle.
In previous work we have analyzed the way housing booms at the top of the
business cycle tend to unwind, relying upon the experience of the USA over the
past 35 years (Case and Quigley 2008). In that analysis we sought to emphasize
the unique aspects of housing markets that contributed to the end of the boom in
the US economy in the twenty-first century.

But by 2008, however, the decline in the US housing and mortgage markets had
moved far beyond the unwinding of a traditional and well-understood housing boom.
We are in the midst of an unprecedented decline. Housing starts and existing sales
are at record low levels, and the huge US mortgage market has collapsed in a sea
of defaults and foreclosures, sending shock waves through the world financial
system. Trillions of dollars in what were thought to be “safe” fixed-income investments have been wiped out in a short period of time.
Now the questions are: When and how will the current severe decline be
arrested? When will the market return to some sense of normalcy? How far will
prices decline? How large will financial losses be? Who will ultimately bear those
losses? What can we do to avoid a disaster like this in the future?
This paper does not pretend to answer all of those questions, but instead to provide a framework emphasizing the economic factors that will ultimately determine those answers.

Our focus will be on the housing market and home prices. The second section
presents a quantitative history of the movement of home prices in the USA
between 1975 and 2008, including the impact of the boom-and-bust cycle of
2000–2008 on the national balance sheet, as well as the historical relationship between
home prices and household income over the cycle.
We then go on to describe the traditional process of disequilibrium adjustment
which is unique to the housing market, and which has played itself out during every
previous recovery period. This housing bust of 2005–2008, however, is different
in a variety of ways which make the task of predicting the timing and the character
of the ultimate bottom more difficult.

The following section presents a perspective that helps integrate the effects of the
important, but seemingly disparate, aspects of the current housing crisis in the USA.
These aspects include home price changes, expectations about price changes, the
demand for housing, and the diffusion of relaxed mortgage underwriting standards
in the USA during the period leading up to the crash in the housing market. This
perspective is the annual user-cost of housing capital – which drives the demand
for housing and homeownership, the demand for housing finance, and the demand
for liquidity in the housing market. This perspective also reconciles the demand for
relaxed standards of mortgage finance and the profitability of those alternative
mortgages to financial institutions. The final section is a brief conclusion.

This paper provides the first systematic analysis of the choice by organizations to occupy green office space. We develop a framework of ecological responsiveness, and we formulate five propositions to explain why specific firms and industries may be more likely to lease green space. We test these propositions by analyzing the decisions of more than 11,000 tenants to choose office space in green buildings or in otherwise comparable non-green buildings located nearby. We find that corporations in the oil and banking industries, as well as government-related and non-profit organizations, are among the most prominent green tenants. After appropriately controlling for building quality and for location within one quarter mile, our empirical analysis shows that firms in mining and construction and organizations in public administration are relatively more likely to lease green rather than conventional office space. Furthermore, organizations employing higher levels of human capital (as measured by skills and compensation) are more likely to lease green office space.

It is widely accepted that aggregate housing prices are predictable, but that excess returns to investors are precluded by the transactions costs of buying and selling property. We examine this issue using a unique data set -- all private condominium transactions in Singapore during an eleven-year period. We model directly the price discovery process for individual dwellings. Our empirical results clearly reject a random walk in prices, supporting mean reversion in housing prices and diffusion of innovations over space. We find that, when house prices and aggregate returns are computed from models that erroneously assume a random walk and spatial independence, they are strongly autocorrelated. However, when they are calculated from the appropriate model, predictability in prices and in investment returns is completely absent. We show that this is due to the illiquid nature of housing transactions. We also conduct extensive simulations, over different time horizons and with different investment rules, testing whether better information on housing price dynamics leads to superior investment performance.

This paper provides the first credible evidence on the economic value of the certification of “green buildings” -- derived from impersonal market transactions rather than engineering estimates. Our analysis of clusters of certified green buildings and nearby comparables establishes that buildings with “green ratings” command substantially higher rents and selling prices than otherwise identical buildings.

Moreover, variations in the premium for green office buildings are systematically related to their energy-saving characteristics. An increase in the energy efficiency of a green building is associated with a substantial increase in selling price – over and above the premium for a labeled building. Further evidence suggests that the intangible effects of the label itself may also play a role in determining the values of green buildings in the marketplace.

Even though several studies have assessed the degree of progressivity in targeting
communities under the participatory Social Investment Fund (SIF) approach to
the provision of local public goods, there is yet little evidence on how increasing
decentralization affects the quality of this targeting. We identify the impact of
increasing decentralization on community targeting using the unique situation of
Zambia’s SIFs where the degree of decentralization changed in time and space
across districts over the 15 years of program implementation. We find that greater
decentralization of SIFs’ functions to districts that had been deemed to have the
necessary level of managerial capacity led to more progressive targeting across
wards, mildly so at the national level and strongly so within districts. We also
observe how local electoral politics gained importance with greater
decentralization, with more votes received by the candidate from the majority
party in the district council attracting more projects to a ward, and more projects
in a ward rewarded by more votes for the councilor from the incumbent party.
Decentralization thus made concerns with community poverty more salient in
targeting and local politics more important in public goods allocation.