A Loan Modification Approach to the Housing Crisis

Abstract

The housing crisis threatens to destroy hundreds of billions of dollars of value by causing homeowners with negative equity to walk away from their houses. We advocate a legal reform that would allow homeowners to reduce principal while giving mortgage holders an equity interest. Such a plan would give homeowners an incentive to keep or resell their homes, thus reducing the market value loss of homes while protecting the effective value of creditors’ interests. Two further elements of the plan are that it uses prices based on the average house price in a particular ZIP code; and it is automated.

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