A Framework to Solve the Current US Housing Crisis

Abstract

In this paper I outline a framework that should help solve the current US housing crisis. Homeowners are given the possibility to refinance their house with a new 30-year mortgage that represents 80% of the current value of the property. The remaining 20% is financed by the homeowner. In addition, the homeowner issues a call option allowing the mortgage providing institution to participate, along with the homeowner, in a possible price increase over the term of the mortgage. In case the homeowner is not in a position to finance the 20% of the current market value of the property, the framework allows the homeowner to sell his property in the market and to buy back a house with a 20% lower value. The latter should generate the required liquidity in the housing market allowing all parties involved to recover partially the losses when the market will recover over the next three decades, and should stimulate the economy at the global level through an increased job mobility and through the construction and maintenance sector.