In an op-ed column published in The New York Times, Yale University economics professor Robert J. Shiller framed the resurrection of the housing market as a ‘collective action problem’ that continues to defy resolution by a unified industry.
‘At the moment, the trouble in our real estate markets and the drag these markets are placing on our entire economy may be understood as a collective action problem,’ Shiller wrote. ‘In a nutshell, mortgage lenders need to write down the amounts owed by individual homeowners – that is, let everyone sit down and relax – but the different stakeholders have been unable to reach an agreement, even if it is in their common interest.’
Shiller argued that write-downs would benefit lenders that would otherwise ‘lose so much on the legal costs and depressed market values of the homes that it would be in their interest to lower mortgage balances so the homeowners stay in place and don't default.’ He also stressed that write-downs would create a positive effect on the broader national picture.
‘If such mortgage principal reductions could be applied on a large scale, there could be large neighborhood effects, raising a sense of optimism among homeowners and bolstering the value of all homes and, ultimately, the whole economy,’ he wrote. ‘But mortgage lenders in all their different forms lack a group strategy.’
Furthermore, Shiller advocated a theory proposed by Cornell University law professor Robert C. Hockett on using eminent domain seizures on underwater mortgages as a means of stabilizing the housing market.
‘Eminent domain law needn't be restricted to real estate,’ he stated. ‘It could be applied to mortgages as well. Governments could seize underwater mortgages, paying investors fair-market value for them. This is common sense too. The true fair-market value for these mortgages is arguably far below their face value, given the likelihood of default, with its attendant costs.
‘Professor Hockett argues that a government, whether federal, state or local, can start doing just this right now, using large databases of information about mortgage pools and homeowner credit scores,’ Shiller added. ‘After a market analysis, it seizes the mortgages. Then it can pay them off at fair value, or a little over that, with money from new investors, issuing new mortgages with smaller balances to the homeowners. Taxpayers are not involved, and no government deficit is incurred. Since homeowners are no longer underwater and have good credit, they are unlikely to default, so the new investors can expect to be repaid.’