Tuesday, October 19, 2010

Paul Krugman solves the foreclosure crisis

That thoughtful Paul Krugman has a plan to fix the mortgage market. He endorses the idea of “giving mortgage counselors and other public entities the power to modify troubled loans directly”.

That might be a good idea if you had a mortgage you didn’t want to pay back. But, inconveniently, a mortgage is actually a legally-binding contract between two parties, and there is nothing in that contract about modifications without the consent of the lender. This speaks to such abstract and old-fashioned concepts as private property, rule of law, the sanctity of contracts and a thousand years of Anglo-Saxon jurisprudence (which if you go way back, is all about mortgages and conveyances).

But even if we wanted to chuck out all of those inconvenient and old-fashioned concepts, would it still be a good idea to give  “public entities” the power to modify “troubled loans”? Yes, if you wanted to wreck the mortgage market. If mortgages are converted by law from loans backed by the power of foreclosure into semi-secured consumer loans underwritten primarily on the basis of the borrower’s credit rating, then you can kiss home-ownership for most Americans goodbye. And the Freddie and Fannie bailouts will not cost us a few hundred billion. They’ll cost a trillion.


Katherine Ho said...

It's so sad that few Americans will say goodbye to home ownership. Are they going to rent for the rest of their lives? Anyway, this article was posted a long long time ago. I think we also came from the same situation but now the economy is rising up gradually. The main reason why I am going to get a unit at the lakefront residences I just hoe that my mortgage will be enough to get one

Unknown said...

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