When borrowers owe more than their homes are worth, they have considerable incentive to simply walk away. These defaults result in further declines in home prices.
Martin Feldstein, a professor of economics at Harvard University and economic adviser to the Reagan administration, says he has a plan that will encourage underwater borrowers to continue paying, reported WSJ.
For any home owner with a loan-to-value ratio greater than 120 percent, Feldstein would offer a reduction in principal, the cost of which would be shared between the government and the lender down to the 120 percent level. In exchange, the borrower would accept a recourse loan that could not be discharged by bankruptcy.
He argues that this plan would stabilize the housing market and cap housing prices at the current level.
Read columns of Martin Feldstein: