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Friday, September 07, 2007

Edward Glaeser: Sensible Solutions to the Subprime Crisis

Edward Glaeser suggests shared-appreciation mortgages as a possible response to the mortgage meltdown:

Sensible solutions to the lending mess, by Edward L. Glaeser, Commentary, Boston Globe: ...[A] proposal that would give up to $5,000 to people who lose their homes in a foreclosure ... is a sensible and humane response to the subprime crisis, but there may also be ways to help avoid more foreclosures altogether. If the [government] can induce lenders to offer refinancing at lower interest rates, by offering them a share of future housing price appreciation, then foreclosures could be reduced without trampling on creditors' rights. ...

Over the past 15 years, American credit has become far more democratic, as ordinary people have found it easier to borrow to buy homes or cars or send their kids to school. ... Lenders who broke the law should be punished, but a wholesale attack on creditors' rights will punish the prospective low-income borrowers of the future by making it impossible for them to get a loan. ...

More can be done to avoid foreclosures than just urging lenders to renegotiate, but bailouts must be avoided and creditors' rights must be respected. A perpetual moratorium on foreclosures, for example, would be a foolish repudiation of the rights of lenders. Who would lend after that precedent?

Another way is to make refinancing at lower interest rates more attractive for lenders by encouraging shared-appreciation mortgages. These mortgages ... offer lower interest rates in exchange for some of the upside potential on the house. For example, a lender might offer a 6 percent interest rate instead of an 8 percent rate, in exchange for 50 percent of the increase in the value of the house at the time of eventual sale. Most borrowers don't want to lose this upside, but for someone facing foreclosure, losing the upside may be a lot better than losing the house altogether.

The best case scenario for shared-appreciation mortgages would be that with ... regulatory encouragement, new private lenders would refinance some mortgages completely at a lower rate in exchange for some upside. Competition among lenders could help borrowers get the best deal possible. ...

Punish law-breaking lenders, not future borrowers. If we eliminate the rights of creditors to foreclose, then we will make it impossible for borrowers to get a loan. A better way is to offer financial aid to people who lose their homes, and to look for ways to induce lenders to refinance at lower interest rates.

    Posted by on Friday, September 7, 2007 at 12:15 AM in Economics, Housing, Policy, Regulation | Permalink  TrackBack (0)  Comments (14)

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