By postulating that there is a demand for housing, in an economy rapidly shedding jobs, tightening credit requirements, and casting a huge number of citizens into the 'no-credit-at-all' category (bankruptcy/foreclosure), Hubbard and Mayer conclude:
A reduction of mortgage interest rates to 4.5% (or, given yesterday's Fed action, to a lower level) is superior to other proposals that focus only on stopping foreclosures, or on reforming the bankruptcy code to keep people in their homes. Stopping foreclosures, however meritorious, may not limit the dangerous decline in house prices as much as proponents claim. It could work the other way. Stripping down mortgage balances in bankruptcy would likely raise future mortgage interest rates and lower the availability of mortgages, reducing house prices.
Loan modifications are a reduction in interest paid, right? They also directly and quickly affect the structural challenges. An interest-rate only mechanism could extend the 'debt-depression' for years.
There is a
Given the problem is so serious, why 'bet the farm' that an artificially reduced rate will bring the desired equilibrium? Given all the hope-for-the-best approaches that have already failed, across a range of problems, wouldn't the direct approach, modifying some loans, actually be more robust?
The Businessweek study:
No comments:
Post a Comment