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?
Three broad issues in housing and mortgage markets
Which households will face foreclosure?
Mortgage servicers and lenders will modify fewer loans than they should
Why should the country try to reduce upcoming foreclosures?
Evaluating alternative policy responses
Policies to Improve the Functioning of the Mortgage Market
Ease monetary policy
Relax restrictions on Fannie and Freddie
“Modernize” the FHA
Support mortgage counseling
Encourage shared-appreciation mortgages
Clarify servicers’ fiduciary responsibilities
Compile information on mortgage holders
Policies of Government Exhortations for Private-Sector Actions
Coordinate the “teaser freezer”
Expand the teaser freezer to cover more borrowers and principal writedowns
Encourage forbearance on foreclosures
Policies that Forcibly Reduce Amounts Owed
Change treatment of primary residences in bankruptcy
Block interest-rate resets
Block foreclosures for a specified period
Legislate mortgage writedowns
Allow current homeowners to stay as renters
Policies Based on Providing Government Funding
Change tax treatment of mortgage writedowns
Create a tax credit for home buyers
Direct money to state and local governments
Make loans to mortgage lenders through the Federal Home Loan Banks
Have a federal agency or corporation handle widespread refinancing of mortgages