My Mortgage Plan, Continued
My latest essay elaborates on my debt-equity swap idea.
The swap is in some ways a compromise between two other mortgage relief plans. Dean Baker would have homeowners give up all of their equity and become renters. Steven Pearlstein would have the size of mortgage loans reduced to what the borrower could presumably carry using standard income guidelines.
The Baker plan strips homebuyers of their asset in order to remove their mortgage liability. He thinks that homebuyers are victims of a bubble, and somebody else needs to bear the cost. The Pearlstein plan gives buyers a reduction in their liability in exchange for nothing. He thinks homebuyers are victims of aggressive lending, and somebody else needs to bear the cost.
The swap plan treats homebuyers as adults who made grownup decisions. It says that they can stay in their homes, but they have to give up some of their equity in order to do so. However, unlike the Baker plan, they do not have to revert to becoming renters.
We’re seeing a lot of stories these days that X percent of troubled mortgages are investor loans and Y percent are cash-out refinances. If most mortgages used to purchase owner-occupied homes are not in trouble, then I would expect lenders to be willing to make such loans, so that the housing market itself would remain reasonably liquid. My guess is that in fact there are plenty of owner-occupied purchase loans in trouble, also. But it would be useful to have the data.
I still think that the big issue here, if any, is the overall trust in financial intermediation. We’ve enjoyed very low risk premiums across the board for several years, and if all of that were to unravel there would be widespread effects on investment. I do not see any reliable way to predict how long or how widespread the damage will be to confidence in financial intermediaries.