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A Loan Modification Approach to the Housing Crisis

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  • Eric A. Posner
  • Luigi Zingales

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. Copyright 2009, Oxford University Press.

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Bibliographic Info

Article provided by Oxford University Press in its journal American Law and Economics Review.

Volume (Year): 11 (2009)
Issue (Month): 2 ()
Pages: 575-607

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Handle: RePEc:oup:amlawe:v:11:y:2009:i:2:p:575-607

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Cited by:
  1. Vikrant Vig & Amit Seru & Tomasz Piskorski, 2009. "Securitization and Distressed Loan Renegotiation: Evidence from the Subprime Mortgage Crisis," 2009 Meeting Papers, Society for Economic Dynamics 1169, Society for Economic Dynamics.
  2. Carlos R. Madeira & Víctor Pérez F., 2013. "Gestión Hipotecaria de las Familias Chilenas," Notas de Investigación Journal Economía Chilena (The Chilean Economy), Central Bank of Chile, vol. 16(2), pages 122-133, August.
  3. Sumit Agarwal & Gene Amromin & Itzhak Ben-David & Souphala Chomsisengphet & Douglas D. Evanoff, 2011. "The role of securitization in mortgage renegotiation," Working Paper Series, Federal Reserve Bank of Chicago WP-2011-02, Federal Reserve Bank of Chicago.
  4. Bhardwaj, Geetesh & Sengupta, Rajdeep, 2014. "Subprime cohorts and loan performance," Journal of Banking & Finance, Elsevier, Elsevier, vol. 41(C), pages 236-252.
  5. Joanne W. Hsu & David A. Matsa & Brian T. Melzer, 2014. "Positive Externalities of Social Insurance: Unemployment Insurance and Consumer Credit," NBER Working Papers 20353, National Bureau of Economic Research, Inc.
  6. Agarwal, Sumit & Amromin, Eugene & Ben-David, Itzhak & Chomsisengphet, Souphala & Piskorski, Tomasz & Seru, Amit, 2013. "Policy Intervention in Debt Renegotiation: Evidence from the Home Affordable Modification Program," Working Paper Series, Federal Reserve Bank of Chicago WP-2013-27, Federal Reserve Bank of Chicago.
  7. Zhang, Yan, 2013. "Does loan renegotiation differ by securitization status? A transition probability study," Journal of Financial Intermediation, Elsevier, Elsevier, vol. 22(3), pages 513-527.
  8. Benito Arruñada & Amnon Lehavi, 2010. "Prime property institutions for a subprime era: Toward innovative models of homeownership," Economics Working Papers 1217, Department of Economics and Business, Universitat Pompeu Fabra.

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