Six Years on and Still Counting: Sifting Through the Mortgage Mess

Abstract

Six years after reaching their bubble-year peaks and then plunging, U.S. primary and secondary mortgage and real estate markets remain one of the principal drags upon U.S. economic recovery. Home prices remain well below even those post-bubble-year highs reached in 2010, while as many as 12 million new mortgages face foreclosure in the coming six years. And this is assuming no further price declines – which, owing to critical symbiotic linkages between home prices and macroeconomic performance, cannot be safely assumed. Foreclosures depress home prices, which depress consumer expenditures, which depress employment and income, which heighten the incidence of default and foreclosure, which depresses home prices yet further…Is there any way out of this mess? Why do we linger in self-worsening slump?

The answer turns out to be exceedingly complex, both in terms of the number of causal factors in play and in terms of the directions of these factors’ interactions. Building on earlier work of the Author, this Article aims both exhaustively to catalogue, and in so doing to impose some intuitively appreciable order upon, the surprisingly large number of mutually interacting factors now underwriting continued uncertainty and slump in the mortgage markets. The hope is that doing so will serve to render the problem both more tractable and more soluble.

The Article commences by first identifying the principal interests at stake in our ongoing mortgage market troubles, as well as the principal constituencies that hold these interests. This assists both normative and political feasibility analysis of alternative solution strategies. The Article then identifies an overlapping convergence of interests among most if not all interested constituencies. This affords hope that a politically feasible solution benefiting everyone might be developed, while also suggesting that coordination or collective action problems might be playing important roles in preventing solution thus far. The Article then proceeds to identify, in a comprehensive and orderly manner, all of the principal impediments to satisfaction of the convergent interests identified. It finds that the most important such impediments are indeed rooted in collective action challenges that authorized collective agents might surmount.

From the identification of constituencies, interests, and impediments to satisfaction of those interests, the Article turns to identification and provisional assessment of alternative means by which authorized collective agents can remove the mentioned impediments and break the current impasse. In keeping with that aim, the Article also notes certain not yet fully resolved empirical questions, the resolution of which will assist in fine-tuning feasible policy options. A Conclusion looks ahead to next steps, while an Appendix summarizes the Article’s principal factor- and causal-relational findings in flowchart form. One principal conclusion reached is that municipalities exercising their eminent domain powers in partnership with investors are presently best situated to take the next steps out of the mortgage morass.

Keywords: recorvery, financial crisis, mortgage, foreclosure