Policies to Deal with the Implosion in the Mortgage Market

Robert Shiller

The B.E. Journal of Economic Analysis & Policy, 2009, vol. 9, issue 3, 25

Abstract: This paper relates the 2006-2008 meltdown in mortgage markets to falling asset prices, excessive psychological reaction to the burst bubble, and new mortgage vehicles incapable of accommodating sudden changes in asset values. A combination of market-based and regulatory innovations are proposed. The paper suggests placing greater reliance on innovative futures markets in real estate, inducing the flow of capital to vehicles having self-regulatory features and cultivating resiliency in the market. The bankruptcy law also might come to include "circuit breaker" delays in finalizing settlements during turbulent market settings. Some of the fundamental premises underlying mortgage finance should also be reconsidered. Stakes in individual residences could be combined with stakes in regional property portfolios. Finally, the paper promotes a system of "continuous workout mortgages" regularly readjusting loan balances to reflect economic conditions. These contracts could provide needed flexibility; they also offer systematic advantages over the various sector-based bailout strategies inherent in current loan-modification proposals.

Date: 2009
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DOI: 10.2202/1935-1682.2222

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