According to Cornell Law Professor Robert Hockett, economists agree that underwater mortgage loans remain the principal drag upon U.S. economic recovery. They also recognize that principal writedowns are the only solution to this problem. “Even the loan holders themselves recognize that writedowns maximize the expected values (EVs) of their troubled loans,” says Professor Hockett. “The problem is that a host of classic creditor collective action problems, some familiar and others less so, prevent creditors' acting in their acknowledged self-interest. Collective action problems require collective agents for their solution – agents authorized to act on behalf of all. The best situated agents right now are municipalities, which are first to feel the impact of mass foreclosure, homelessness, property value and revenue base declines, and consequent blight.”
The 'Municipal Plan' that Hockett advocates partners cities with private investors to purchase troubled mortgages at fair market value, refinance, and thereby recoup value for all while reversing urban blight and keeping mortgagors in their homes. Adds Hockett, “Because it's a local solution, federalists should be as happy with it as are debtors and creditors. And because it amounts to an inverse of the action upheld in the infamous Kelo decision of 2005, property rights advocates should love it as well.”
Full details about the municipal plan to rescue underwater mortgage loans can be found in Robert Hockett’s paper, It Takes a Village: Municipal Condemnation Proceedings and Public/Private Partnerships for Mortgage Loan Modification, Value Preservation, and Economic Recovery.
The plan is gaining traction with municipal government officials, investors, and the media.