CHICAGO–A new study of the housing crisis of a decade ago has been published that could help ease a future housing crisis.
A key issue examined in the paper, which can be found here, is the approach taken by many policymakers who during the 2008 housing crisis believed they could limit the economic damage by helping to reduce amounts of principal owed on many mortgages, thus preventing foreclosures—especially for the millions of people who saw the value of their homes fall below the value of their mortgages, as the Wall Street Journal noted in its analysis of the paper.
But according to co-authors Pascal Noel, an assistant professor at University of Chicago Booth School of Business, and Peter Ganong, an assistant professor at University of Chicago’s Harris School of Public Policy, lowering principal had very little effect on defaults for underwater borrowers.
“Moreover, it turned out to be a very expensive initiative,” the Journal reported. “The federal government spent about $4.6 billion on principal reduction to prevent foreclosures from 2010 to 2016, but the policy’s impact was so small, each avoided foreclosure ended up costing taxpayers at least $800,000.”
During the 2007-09 recession, about 11 million people with residential mortgages (24% of all residential properties) were underwater.
According to the paper’s findings, the most effective policy to help those homeowners and give the economy a boost might have been to temporarily lower the underwater homeowners’ mortgage payments, freeing up cash flow and thus spurring consumer spending.