Douglas W. ElmendorfSenior Fellow, Brookings
Without government action, mortgage foreclosures will rise steeply for the next several years, mainly because declining house prices will leave many property owners with negative equity. Proposals for addressing this problem can be grouped into four categories—improving mortgage-market functioning, exhorting certain private-sector actions, forcibly reducing amounts owed, and using significant government funds. Policies enacted or suggested within the first two categories likely will have just a moderate effect on foreclosures. Policies advocated in the latter two categories could have a larger effect, but only through notable changes in the legal backdrop or government financial commitment to mortgage lending. In deciding how to proceed, policymakers should weigh the fairness of alternative approaches and effects on future mortgage credit together with the consequences of inaction for households and the overall economy.
This note provides an overview of policies that have been put forward to address the current mortgage problems. I focus on presenting the advantages and disadvantages of different policies rather than building the case for the particular policies I favor. (Also, most of the factual assertions in this preliminary draft are not documented; appropriate references will be added later.)
The note covers the following topics in turn:
What is the Foreclosure Problem?
Policies to Improve the Functioning of the Mortgage Market
Policies of Government Exhortations for Private-Sector Actions
Policies that Forcibly Reduce Amounts Owed
Policies Based on Providing Government Funding