The continuing decline in housing prices has economist Martin Feldstein calling for government intervention.
On the opinion page of yesterday's Washington Post, Feldstein (Baker professor of economics, who soon ends his term as president of the National Bureau of Economic Research) sketched the framework for a program of low-interest government loans that, he argued, would help mitigate the foreclosure crisis by giving homeowners an incentive to stay in their homes rather than walk away as their equity declines and financial pressures mount.
Feldstein put forward some arresting figures:
Nearly 10 million Americans, about one-fifth of all homeowners with mortgages, already have mortgage debts that exceed the value of their homes. As prices fall, that number could double during the coming year. Many people would have mortgages that exceed their home's value by 20 to 50 percent.
Then he outlined how the program might work to interrupt the downward spiral of falling prices and further defaults:
Consider how the program would work for someone who has a $360,000 mortgage on a home worth $400,000, a 90 percent loan-to-value ratio. A 15 percent drop in prices would push that homeowner into a negative equity position, because the house's value would be only $340,000. But if one-fifth of that $360,000 mortgage ($72,000) were converted to a loan from the government, the mortgage loan be $288,000. As a result, the 15 percent decline in housing prices would still leave the homeowner with $52,000 in positive equity -- the difference between the reduced house price of $340,000 and the new mortgage of $288,000. There would be a strong reason not to default.
Read the rest here.
