Broad Support Among Economists and Experts of the Goal of Providing Mortgage Debt Relief to Distressed Borrowers

My latest note supporting the Frank-Dodd proposal for mortgage debt relief has caused some vituperative reactions among some of the readers of this forum: some accused me of being a Socialist/Marxist (too bad I am a centrist economist who believes in market economies where governments provide the necessary public goods); some suggested I am supporting the Democrats’ plan as a way to seek a job in the next administration (sorry but I have not been involved in any form in any presidential campaign, have no intention of going back to policy in D.C. and I already have two full time jobs being an academic and running an economic consultancy); and so on….

Very few reflected on the substance of this proposal and its strong economic logic that would benefit borrowers, lenders and even the government as the fiscal cost of no action (a systemic banking crisis that would trigger a costly fiscal bailout of banks given deposit insurance) is much higher than the potential modest fiscal cost of this proposal.

The story is simple: many homeowners are underwater (have negative equity in their homes) and/or are unable to service their mortgage payments. Given that mortgages are mostly non-recourse loans millions of such homeowners will walk away from their homes and/or end up into an avoidable foreclosure. Freezing reset of interest rate on mortgages is not enough; when economic agents are unable to pay (insolvent) debt relief is both unavoidable and necessary. A disorderly workout of unsustainable debts make everyone – borrowers, lenders and the government – worse off.

Unfortunately for the critics of this proposal the experts who are supporting it are very broad and ranging from Democrats to Republicans, from folks to the left of the center and others to the right of the center or outright conservative. And the latest news is that Senator Dodd is on the verge of reaching an compromise with Senate Republicans on a slightly modified version of his plan.

Here is below a sample of the views of a number of leading economists and experts who are either directly supporting the Frank-Dodd proposal or supporting its core idea of providing debt relief to those mortgage borrowers who are deserving it via a reduction of the face value of the unsustainable debt payments…