Martin Feldstein outlined his rescure plan on the housing sector. Unlike recent cryout for government bailout or forced alteration of mortagage contract, he proposed, in my view, the first potentially workable more market-based solution. The idea is to offer incentives to homeowners not to walk away and raise the opportunity cost of mortgage default.
Here’s one way that such a program might work: The federal government would lend each participant 20% of that individual’s current mortgage, with a 15-year payback period and an adjustable interest rate based on what the government pays on two-year Treasury debt (now just 1.6%). The loan proceeds would immediately reduce the borrower’s primary mortgage, cutting interest and principal payments by 20%. Participation in the program would be voluntary and participants could prepay the government loan at any time.