Harvard economist Martin Feldstein has a novel way to help borrowers who have equity in their home, but might still walk away from their mortgage payments if the market value of their homes drops below their mortgage loan amount.
Feldstein wants the federal government to give them non-collateralized loans to bridge the gap. Threatened homeowners could replace 20 percent of their mortgage with a low-interest government loan, up to a loan limit of $80,000.
The risk of a continuing downward spiral in housing prices is the biggest threat to the U.S. economy, Feldstein says, and the very structure of securitized mortgage finance holds the potential to cause a global financial crisis.
"Both of these problems will remain until a new policy brings stability to house prices," Feldstein wrote in the Financial Times.
"If house prices fall another 15 percent, negative-equity mortgages will rise to 20 million."
Under Feldstein's proposed plan, creditors would be required to accept this partial mortgage pay-dow, and to reduce the monthly interest and principal by the same 20 percent.
Feldstein says his plan would allow people who now have a mortgage equal to 90 percent of the value of the roofs over their heads to see that mortgage fall to just 72 percent of the value.
"The policies adopted until now will not stop the downward price spiral," Feldstein says.
"Each default puts downward pressure on existing prices, increasing the likelihood of further defaults. It is this spiral that threatens the American economy and the global financial system."
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