Nightmares, Norms and Negative Equity
Concurring Opinions:
Thanks, Sarah, Dan, and everyone at Concurring Opinions for inviting me to guest blog.
For a Property professor, these are riveting times. The mortgage nightmare continues. As in much of the country, here in Minnesota, thousands of houses stand vacant and decaying. Parts of Minneapolis have been devastated. But the problem may have crested in the cities.
Not so in the suburbs. Five-year subprime ARM loans that were originated in 2004 and 2005, when McMansions were popping up in suburbs like dandelions in my lawn, are not due to re-set their rates until 2009 and 2010. If home values haven’t improved by then, many of those borrowers will have negative equity – that is, they’ll owe more than their homes are worth. That means they’ll be unable to re-finance for as much as they owe, because lenders won’t lend more than the house is worth.
Legal and economic institutions seem at a loss to cope with the crisis, but not for want of trying. There are lots of plans out there, but none seems satisfying. From an academic’s standpoint, it’s fascinating. Rational choice, on the one hand, and norms of fairness, on the other, are interacting in odd and sometimes surprising ways.