How to fix the housing mess

Martin S. Feldstein

The New York Times

It’s time to act, said Martin S. Feldstein. Nearly 15 million homeowners owe more on their mortgages than their homes are worth, and our economy will not recover until they can get out from under that burden and start spending again. Washington has been understandably reluctant to help, because taxpayers don’t want to reward banks that made bad loans or homeowners who could “simply walk away” by defaulting. But there is a way out that would require both banks and homeowners to “make sacrifices.”

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The government could reduce the mortgage principal on underwater homes to 110 percent of a home’s value. The government would absorb half the cost of the voluntary reduction, and the bank the other half. In exchange, the borrower would accept that his non-housing assets could be seized if he defaulted on the reduced mortgage payments. This approach would cost about $350 billion, but it “will be even costlier to do nothing.” Just as we wouldn’t allow a forest fire that threatens a neighborhood to burn out naturally, we can’t let housing prices continue to fall and make “the economy weaker and the loss of jobs much greater.”