The U.S. mortgage game: How should it change?
As Washington works to bail out firms laden with bad debts, discussions begin on preventing a recurrence.
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He proposes structuring mortgages differently so adjustments in payments would be made automatically and continuously over the life of the mortgage according to an index taking account of housing costs and other financial measurements. The goal would be to enable homeowners to afford to make payments.
Professor Shiller also suggests development of an insurance system to protect against the loss of home equity. The result, he says: fewer foreclosures, which are costly to homeowners, lenders, and the nation.
At the moment, the Center for Responsible Lending (CRL), an advocacy group, calculates that the nation will suffer 2.3 million foreclosures in the next two years.
Alex Wormser, an entrepreneur in Marblehead, Mass., proposes another mortgage formula he calls "Ramp," where mortgage payments would rise each year according to the national inflation rate. This system, he says, would permit a reduction of 45 percent in the initial payments on a long-term, fixed-rate mortgage. That would make homes more affordable for more people and reduce risk for lenders.
At his suggestion, a former chief economist of the Department of Housing and Urban Development did a four-year study of this practice in such nations as Chile, Turkey, Mexico, and Iceland, reaching favorable conclusions.
Mr. Wormser claims such a system would obviate the need for a $700 billion rescue package.
To deal with the immediate situation, CRL and the Consumers Union have pushed for bankruptcy law changes to allow bankruptcy judges involved in foreclosures to alter mortgages to help people keep their homes. The mortgage industry opposes such "cram down" processes.
Of course, one source of the mortgage problem has been weak ethics on the part of some mortgage brokers and those applying for mortgages. The 1984 Secondary Mortgage Enhancement Act, intended to increase competition for mortgages from such government-sponsored institutions as Fannie Mae and Freddie Mac, exempted private mortgage brokers from registration and disclosure.
"That is the beginning of the problem," says Jane D'Arista, an analyst with the nonprofit Financial Markets Center, Howardsville, Va. The financial industry ended up issuing mortgage investments that are opaque and in some cases shady. "We don't know the volume or value" of these securities, she says, advocating enough disclosure to establish a market for them like that of a stock exchange.