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A bill to ease the cram down rules died on its way through Congress, and other programs to give homeowners help on mortgage principal did not accomplish much. It didn’t help that the mood in much of the country swung against the overleveraged homeowner.
If you didn’t see CNBC reporter Rick Santelli deliver his famous rant from a Chicago trading floor in early 2009, it’s still on YouTube. You see Santelli turning to shout at the traders, “How many of you people want to pay for your neighbor’s mortgage that has an extra bathroom and can’t pay their bills?”
More recently a senator from Tennessee tossed rocks at the Obama administration for a proposal to write down principal on underwater home mortgages at the taxpayers’ expense, insisting that Tennesseans had acted responsibly in paying for their houses and shouldn’t pay for those who hadn’t.
But it turns out jobs in Tennessee are as dependent on the performance of the rest of the economy as they are anywhere else. A lot of cars get assembled there, and during the Great Recession, one out of every four Tennesseans working in an auto plant lost their job.
So if anybody thinks principal reductions are only about helping unlucky or unwise consumers with their mortgages, the authors suggested, they are not thinking clearly.
The good news is that they think they have a relatively simple fix that won’t require any Chicago traders to subsidize the neighbors.
One purpose of the financial system is to spread risk, they wrote. The current mortgage market concentrates all the risk on the homeowner.
Mian and Sufi called their idea the shared-responsibility mortgage. In effect, it makes the lender and homeowner partners.
If housing values decline 10 percent, the mortgage payment declines by a like amount, and in effect the mortgage principal balance declines. Why would a lender sign up for this risk? They would do it for a higher interest rate and 5 percent of the capital gain when prices increase and the house is sold.
This structure makes the lender a more careful underwriter. But the best feature is that the net worth of the homeowner won’t go to zero, and the spending that drives so much of the economy won’t roll off the table.
Even though the authors aren’t exactly advocates of bailouts, they can’t help but point out that it was the shareholders and creditors of the big banks that got bailed out the last time.
Given that the economic crisis began with middle-class families with a mortgage problem, if anyone got a break it should have been them.
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