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Policies to Deal with the Implosion in the Mortgage Market

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  • Shiller Robert J.

    (Yale University)

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.

Suggested Citation

  • Shiller Robert J., 2009. "Policies to Deal with the Implosion in the Mortgage Market," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 9(3), pages 1-25, March.
    • Handle: RePEc:bpj:bejeap:v:9:y:2009:i:3:n:4
    DOI: 10.2202/1935-1682.2222
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    References listed on IDEAS

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    1. Gary Gorton, 2008. "The panic of 2007," Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City, pages 131-262.
    2. Todd Sinai & Nicholas S. Souleles, 2005. "Owner-Occupied Housing as a Hedge Against Rent Risk," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 120(2), pages 763-789.
    3. Gary Gorton, 2008. "The panic of 2007," Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City, pages 131-262.
    4. Igal Hendel & Alessandro Lizzeri, 2003. "The Role of Commitment in Dynamic Contracts: Evidence from Life Insurance," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 118(1), pages 299-328.
    5. Case, Karl E & Shiller, Robert J, 1989. "The Efficiency of the Market for Single-Family Homes," American Economic Review, American Economic Association, vol. 79(1), pages 125-137, March.
    6. McCulloch, J Huston, 1980. "The Ban on Indexed Bonds, 1933-77," American Economic Review, American Economic Association, vol. 70(5), pages 1018-1021, December.
    7. Shiller, Robert J & Weiss, Allan N, 1999. "Home Equity Insurance," The Journal of Real Estate Finance and Economics, Springer, vol. 19(1), pages 21-47, July.
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    Cited by:

    1. Hayat Khan, 2015. "Some Implications of Debt versus Equity-Based Financing in the Backdrop of Financial Crises بعض آثار الديون مقابل التمويل القائم على الإنصاف في خلفية الأزمات المالية," Journal of King Abdulaziz University: Islamic Economics, King Abdulaziz University, Islamic Economics Institute., vol. 28(1), pages 165-180, January.
    2. Shiller, Robert J. & Wojakowski, Rafal M. & Ebrahim, M. Shahid & Shackleton, Mark B., 2019. "Continuous Workout Mortgages: Efficient pricing and systemic implications," Journal of Economic Behavior & Organization, Elsevier, vol. 157(C), pages 244-274.
    3. Karamon, Kadiri & McManus, Douglas & Yannopoulos, Elias, 2016. "Spillover effects of continuous forbearance mortgages," Journal of Economics and Business, Elsevier, vol. 84(C), pages 95-108.
    4. Koutsobinas, Theodore, 2011. "Animal spirits, liquidity-preference and Keynesian behavioural macroeconomics: An intertemporal framework," MPRA Paper 43027, University Library of Munich, Germany.
    5. Ian M. McDonald, 2009. "The Global Financial Crisis and Behavioural Economics," Economic Papers, The Economic Society of Australia, vol. 28(3), pages 249-254, September.
    6. Robert J. Shiller & Rafal M. Wojakowski & M. Shahid Ebrahim & Mark B. Shackleton, 2017. "Continuous Workout Mortgages: Efficient Pricing and Systemic Implications," Cowles Foundation Discussion Papers 3016, Cowles Foundation for Research in Economics, Yale University.
    7. Rainer Bartel, 2009. "Weltwirtschaftskrise und Politikwechsel," Wirtschaft und Gesellschaft - WuG, Kammer für Arbeiter und Angestellte für Wien, Abteilung Wirtschaftswissenschaft und Statistik, vol. 35(2), pages 145-186.

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