Plan B, from Luigi Zingales

Find it here.  In a nutshell:

Congress should pass a law that makes a re-contracting option available to all homeowners living in a zip code where house prices dropped by more than 20% since the time they bought their property.

Thanks to two brilliant economists, Chip Case and Robert Shiller, we have reliable measures of house price changes at the zip code level.  Thus, by using this real estate index, the re-contracting option will reduce the face value of the mortgage (and the corresponding interest payments) by the same percentage by which house prices have declined since the homeowner bought (or refinanced) his property.

…In exchange, however, the mortgage holder will receive some of the equity value of the house at the time it is sold. Until then, the homeowners will behave as if they own 100% of it. It is only at the time of sale that 50% of the difference between the selling price and the new value of the mortgage will be paid back to the mortgage holder.

Zingales also stresses that half-hearted attempts at bank recapitalization are unlikely to work at this time; he thinks that at least $600 billion would be needed.

This piece has many interesting points throughout, it is worth a full read.  Here is a concordance of writings of Luigi Zingales on the credit crisis.


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