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Yale economist Robert Shiller says the housing crisis is a collective action problem.This means, he argues in a New York Times editorial, that if all mortgage lenders were to act collectively and write down what was owed to them by individual homeowners everyone would be better off.
Shiller offers a few types of collective action to write down mortgage principles. One involves giving “community-based, government-appointed trustees a central role” in writing down mortgages, any idea proposed by Yale economist John Geanakoplos and Boston University law professor Susan P. Koniak.
Another proposed by Robert C. Hockett involves “eminent domain” which allows government to seize property with fair compensation to owners when it is done in public interest—and counld apply to mortgages:
Professor Hockett argues that a government, whether federal, state or local, can start doing just this right now, using large databases of information about mortgage pools and homeowner credit scores. After a market analysis, it seizes the mortgages. Then it can pay them off at fair value, or a little over that, with money from new investors, issuing new mortgages with smaller balances to the homeowners. Taxpayers are not involved, and no government deficit is incurred. Since homeowners are no longer underwater and have good credit, they are unlikely to default, so the new investors can expect to be repaid.”
People are more likely to default on their mortgage when it is underwater i.e. when their homes are worth less than their mortgage. And lenders lose money on foreclosures because of lower home values and legal costs. So it would be in everyone’s best interest according to Shiller if mortgage lenders were to take some such collective action.
Read the entire piece at The New York Times >
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