I thought you might be interested in my recent NYTimes oped
Marty Feldstein
Originally published in THE NEW YORK TIMES October 12, 2011
How to Stop the Drop in Home Values
HOMES are the primary form of wealth for most Americans. Since the housing
bubble burst in 2006, the wealth of American homeowners has fallen by some
$9 trillion, or nearly 40 percent. In the 12 months ending in June, house
values fell by more than $1 trillion, or 8 percent. That sharp fall in
wealth means less consumer spending, leading to less business production and
fewer jobs.
But for political reasons, both the Obama administration and Republican
leaders in Congress have resisted the only real solution: permanently
reducing the mortgage debt hanging over America. The resistance is
understandable. Voters dont want their tax dollars used to help some
homeowners who could afford to pay their mortgages but choose not to because
they can default instead, and simply walk away. And voters dont want to
provide any more help to the banks that made loans that have gone sour.
But failure to act means that further declines in home prices will continue,
preventing the rise in consumer spending needed for recovery. As costly as
it will be to permanently write down mortgages, it will be even costlier to
do nothing and run the risk of another recession.
House prices are falling because millions of homeowners are defaulting on
their mortgages, and the sale of their foreclosed properties is driving down
the prices of all homes. Nearly 15 million homeowners owe more than their
homes are worth; in this group, about half the mortgages exceed the home
value by more than 30 percent.
Most residential mortgages are effectively nonrecourse loans, meaning
creditors can eventually take the house if the homeowner defaults, but
cannot take other assets or earnings. Individuals with substantial excess
mortgage debt therefore have a strong incentive to stop paying; they can
often stay in their homes for a year or more before the property is
foreclosed and they are forced to move.
The overhang of mortgage debt prevents homeowners from moving to areas where
there are better job prospects and from using home equity to finance small
business start-ups and expansions. And because their current mortgages
exceed the value of their homes, they cannot free up cash by refinancing at
low interest rates.
The Obama administration has tried a variety of programs to reduce monthly
interest payments. Those programs failed because they didnt address the
real problem: the size of the mortgage exceeds the value of the home.
To halt the fall in house prices, the government should reduce mortgage
principal when it exceeds 110 percent of the home value. About 11 million of
the nearly 15 million homes that are underwater are in this category. If
everyone eligible participated, the one-time cost would be under $350
billion. Heres how such a policy might work:
If the bank or other mortgage holder agrees, the value of the mortgage would
be reduced to 110 percent of the home value, with the government absorbing
half of the cost of the reduction and the bank
How to Stop the Drop in Home Values Page 1 of 2
file://I:\feldstein\nyt10132011.html 10/13/2011absorbing the other half. For
the millions of underwater mortgages that are held by Fannie Mae and Freddie
Mac, the government would just be paying itself. And in exchange for this
reduction in principal, the borrower would have to accept that the new
mortgage had full recourse in other words, the government could go after
the borrowers other assets if he defaulted on the home. This would all be
voluntary.
This plan is fair because both borrowers and creditors would make
sacrifices. The bank would accept the cost of the principal write-down
because the resulting loan with its lower loan-to-value ratio and its full
recourse feature would be much less likely to result in default. The
borrowers would accept full recourse to get the mortgage reduction.
Without a program to stop mortgage defaults, there is no way to know how
much further house prices might fall. Although house prices in some areas
are already very low, potential buyers continue to wait because they
anticipate even lower prices in the future.
Before the housing bubble burst in 2006, the level of house prices had risen
nearly 60 percent above the long-term price path. So there is no knowing how
far prices may fall below the long-term path before they begin to recover.
I cannot agree with those who say we should just let house prices continue
to fall until they stop by themselves. Although some forest fires are
allowed to burn out naturally, no one lets those fires continue to burn when
they threaten residential neighborhoods. The fall in house prices is not
just a decline in wealth but a decline that depresses consumer spending,
making the economy weaker and the loss of jobs much greater. We all have a
stake in preventing that.
*Martin S. Feldstein, a professor of economics at Harvard, was the chairman
of the Council of Economic Advisers from 1982 to 1984 under President Ronald
Reagan.*
Received on Fri Oct 14 2011 - 09:02:37 EDT
