CRF Blog

Bubbleproof the Housing Market

by Bill Hayes

Peter Coy, writing for Bloomberg Businessweek, argues that The Shared-Responsibility Mortgage Could Help Bubbleproof the Housing Market.

A more useful contribution from Mian and Sufi [authors of House of Debt: How They (and You) Caused the Great Recession, and How We Can Prevent It From Happening Again] is the shared-responsibility mortgage, their prescription to make economies less vulnerable to debt-fueled bubbles. In such a mortgage, lenders take some of the hit if housing prices fall and reap some of the reward if they rise. “Had such mortgages been in place when house prices collapsed, the Great Recession in the United States would not have been ‘Great’ at all,” they argue. “It would have been a garden variety downturn with many fewer jobs lost.”

Their claim is bold, perhaps too bold, but the strategy for making debt less dangerous by putting a twist into the 30-year fixed-rate mortgage is sound. If an index of home prices in a home’s ZIP code fell, say, 30 percent, then the borrower’s monthly payment of principal and interest would also fall 30 percent. That’s not achieved by stretching out the length of the loan, which lenders sometimes will do: Despite the smaller payment, the mortgage would still get paid off over 30 years. Financially speaking, it would be equivalent to getting a reduction in principal.

If prices recover, payments go back up, but never above the original amount. [more]

For a free classroom lesson on economic bubbles, “Tulipmania and Economic Bubbles,” go to our Bill of Rights in Action Archive. The lesson is currently only in PDF and you will have to register (if you haven’t already), which is free.