Over the last two days, I have sat and listened and learned a heck of a lot about the macroeconomy and housing markets. The Ziman Center's Steve Oliner and Stuart Gabriel and their colleagues at the S.F Fed worked hard to put together a great conference. A list of the presentations is available here. As the Director of Research at the Ziman Center, I'm grateful to Tim Kawahara, Julie Lindner and Sarah Mercurio for their hard work in arranging this large conference.
While I learned many things over the 1.5 day conference, I wanted to share just one idea. UC Professors are known for "thinking big". UC Berkeley's Dwight Jaffee discussed the benefits of a new mortgage contract that would adjust the debt a household owes when negative macro shocks take place.
To provide a simple example (this is my example not Professor Jaffee's), suppose that I borrow $600,000 to purchase a $800,000 Los Angeles home. If this home goes up in value, my debt would continue to be $600,000 minus my repayment of the principal. Suppose that my home goes down in value and now is worth $650,000. This would be a 19% reduction in value. Under the "old rules", my housing equity would now declne to $50,000 and I would be close to being "under water". BUT, suppose that a new debt contract says that if my home declines in value by 19% that my debt would decline by 19%. In this case, my new housing equity = 650,000 - 486,000 = 166,000. Note that I still have plenty of housing equity even after the nasty pricing shock. The benefit of this plan is that many fewer homes would end up in foreclosure and this would offer a number of benefits. Why would banks be willing to offer this contract? The price of the loan is likely to change under these terms but banks would compete with each other to attract borrowers.
When academics meet and debate face to face exciting things happen. The UCLA Ziman Center is playing a key role as a thought leader.
Here are some action photos (taken by Julie Lindner) from the conference.