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In Sunday's New York Times, Yale professor Robert J. Shiller gives more ink to one of his idea for helping prevent future housing crisis -- a pitch he also spells out his new book, The Subprime Solution.

Shiller famously called the market top in 2000 in his earlier book Irrational Exuberance. His other claim to fame is co-founding the Case/Shiller Index, which tracks home prices in major U.S. cities.

Now, he's proposing borrowers be able to take their own financial situation into account when they pay off their mortgages.

As envisioned by Shiller, a "continuous-workout mortgage" would adjust the loan terms on a monthly basis based on a borrower's ability to pay. The concept was tried briefly in the late 1970s and '80s, when skyrocketing inflation was pushing mortgage payments higher.

Shiller thinks its makes a lot more sense to allow homeowners' the option to adjust mortgage payments before things ever get bad.

Under such mortgages, the lender would price the "cost" of allowing homeowners to change their payments at will into the original price of the loan. Theoretically, the deal would also save lenders on future foreclosure costs.

It's hard to know how well these kinds of mortgages would work in practice and such a big reform to the mortgage market would require government help.

But the idea sure seems worth a look for both Presidential candidates who so far have been mum on specific long term housing reforms.

categories: Understanding The Crisis

11:40 - September 22, 2008

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