Luigi Zingales has written an essay on the dangers posed by strategic mortgage defaults, and it has led me to rethink my position on the issue.
My basic view is that the federal government has subsidized homeownership to an excessive degree, and this has led to a number of pathologies, e.g., think rental markets that effectively reduce labor mobility and increase unemployment. In an environment shaped by a higher level of strategic mortgage default, my assumption had been that we’d see banks demand larger down payments and tougher scrutiny of borrowers, which wouldn’t be a bad thing, in my view. To be sure, homeownership levels would decrease, but I see that as a desirable outcome. The trouble with my rosy scenario is that getting from here to there would be a wrenching and difficult process. Zingales offers an alternative.
Eric Posner and I have proposed a simple solution to the problem of underwater mortgages. We envision a reform of the bankruptcy code that, in areas where house prices have dropped precipitously, would require lenders to give homeowners the option of resetting their mortgages to the current value of their houses. In exchange, the lenders would get 50 percent of the houses’ future appreciation. To keep homeowners honest—that is, to prevent them from doing minimal upkeep in the knowledge that they stood to gain less from a home-price increase—the capital gain would be measured based on an average of houses selling in the area, rather than on the change in the value of the actual house.
This proposal eliminates all the incentives for a strategic default without excessively rewarding the borrowers. In fact, the proposal’s main appeal is that it tries to split the costs and benefits fairly between lenders and borrowers, without having taxpayers subsidize both, as the Obama administration’s interventions have done.
Zingales ends his essay on a cynical note, suggesting that it won’t have a political constituency because it doesn’t involve taxpayer giveaways. Perhaps he’s right. But I see no reason why conservatives and libertarians shouldn’t forcefully make the case for this approach.
On a related note, Matt Yglesias and Felix Salmon have recently written about the thinness of America’s rental markets and I couldn’t agree with them more about the baleful consequences. In much of the United States, renting is not a realistic option. This wouldn’t be a problem if it simply reflected the preferences of American consumers. It is a problem if it reflects the fact that homeowners receive vast subsidies that renters do not. Some kinds of redistribution strike me as perfectly sound. Redistribution from renters to owners does not.
For a somewhat quirkier perspective on the housing market, I recommend a post on “What Makes a Home Valuable?” by John Robb, a brilliant military theorist who has been writing extensively on the rise of resilient communities.
Old model: Location, location, location. Basically, is the home located in a great school district? Is it within commuting distance to city? Is it close (but not too close) to public transportation (to the extent that is available)?
The new model, in Robb’s view, rests on whether your home is located in a community that can survive the economic dislocation that he’s certain is on the way, and so the right questions are:
- Is the home located in a viable community? One that you could work with to solve problems as they emerge?
- Is there a strong tradition of entrepreneurship in the community such that it allows the fast formation of new ventures?
- Is the community defensible? Considerations include geographical footprint, proximity to cities, entry/exit, etc.
- Does the community have arable land available for food production? There are so many factors here, it would take a book just to explore them.
There’s more. Some will dismiss Robb as a crank or a paranoiac. I tend to think that many of the qualities he identifies would be desirable whether the collapse he envisions comes or not.