Designing effective policy responses to the housing and mortgage problems is not easy. In particular, it is neither feasible nor appropriate for the government to ensure that all homeowners, regardless of their mortgages or overall financial situations, are able to stay in their homes.

However, it is both feasible and appropriate in my view for the government to reduce the number of homeowners who will lose their homes in the next few years. …

The government has a crucial part to play in resolving the current mortgage mess. Let me explain why: First, the government has long had an active role in housing and housing finance.

This role stems partly from the view that homeownership encourages responsible citizenship and strengthens people’s ties to their neighbors and communities. It also stems partly from the view that financial markets do not always conform to economists’ idealized conception of markets: Asymmetric information between borrowers and lenders, leveraged financial institutions that are vulnerable to “runs” when savers’ confidence falters, and the possibility of contagion in the financial sector all justify government involvement. …

This story continues below
Advertisement

We now face challenges in housing finance that are unprecedented since the Depression of the 1930s, and it’s natural to think that the government’s role should be increased under these very unusual conditions. … [New legislation ought to] include reform of the bankruptcy law to allow judges to write down principal amounts owed on mortgages. …

This reform has the key advantage of targeting mortgage relief to those families that are in the most perilous economic circumstances and for whom relief is most appropriate — a targeting that is difficult or impossible to achieve through most other policies for addressing current mortgage problems. …

brookings.edu