Wednesday, March 9, 2011

Underwater Mortgages

The number of Amricans who owe more on their household mortgages than their house is worth now exceeds 11 million (23% of all mortgaged homes).
One of the marvelous things about capitalism is that a peoples' wealth can increase without any effort on their part as prices increase. The reverse is also true. Through no action on the part of the asset holder, wealth can decrease--occasionally dramatically as in 2008 when housing prices plummeted 20 to 30 percent. Such a big swing in value can make old contracts impossible to honor.

Of course, this was a paper phenomenon, not a tornado that made people homeless, though the physical result was similar. The banks are resisting reducing their mortgages because then they would have to admit they are bankrupt under current banking rules. The government could have changed the rules one-time to allow banks to write-off say 20% of their mortgages' value without it being a charge against their capital in exchange for a similar reduction in what home owners owe.
We celebrate the glory of capitalism, but don't have institutions that acknowledge its inherent volatility.

No comments: