Lowering mortgage balances on a national scale to a level that disincentivizes defaulting on underwater homes would save both banks and homeowners money, while kick starting the housing market. But a lack of communication and government interest has prevented such action thus far. According to a New York Times editorial by Robert Shiller, one of the professors behind the Case-Shiller Index, fixing the housing market will require collective action on the parts of banks, government and homeowners.
Those who own mortgages, home equity lines of credit, residential mortgage-backed securities and shares in banks and finance companies, “live all over the world and have no way of communicating with each other, let alone coming to an agreement to give homeowners a break, “ Schiller said.
The solution is simply the will to act. Schiller argues for a proposal by Robert Hockett that calls for the government to seize underwater mortgages via eminent domain law.
The plan has federal and local governments paying fair market value for mortgages on distressed homes with capital from new private investment funds. The financial industry would receive compensation for wiping their hands clean of troubled loans, while the government would refinance those mortgages with homeowners so that they don’t cut and run from devalued homes. Schiller said that would stabilize neighborhoods, boost confidence and improve the economy. [NYT]