Thursday, July 21, 2011

Tough love on mortgages

Thought-provoking piece by William Gallston of the Brookings Institution about the stagnant housing market.  Housing foreclosures and underwater mortgages continue to slow down the economy; outgoing FDIC chief Sheila Bair attributes much of the problem to banks' unwillingness to write off uncollectable consumer debt (including mortgages, second mortgages, home equity lines and regular credit cards).  Gallston summarizes three ideas that might be worth considering, all requiring some legislation:
  1. Two Chicago professors suggest writing down mortgages in zip codes with the largest drops in property values, with the bank getting in return a substantial portion of any future appreciation
  2. Columbia b-school dean Glenn Hubbard would use public funds to refinance underwater mortgages, with taxpayers poised to benefit from future price appreciation
  3. Changing the law to allow bankrupcy judges to write down mortgages (this might be a bit too one-sided for the banking community to swallow)
Presumably if the surplus of houses were wiped out and housing prices finally hit bottom, this critical sector of the economy would recover.  Also, consumers would have healthier balance sheets and start spending more.  

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