This is from Eagle’s and Domian’s paper “Quasi-Real-Indexed Mortgages to the Rescue”:

“With the U.S. Federal Government owning so many mortgages through its bailout of Fannie Mae and Freddie Mac, there may be a unique opportunity for the government to provide a principal break to mortgage holders in return for converting the mortgages to QRIMs. Based on a old January 2009 estimate, the principal reduction would be about 7.8%. With a principal reduction of 7.8% and QRIM payments being 22% below traditional mortgage payments, we are talking about approximately 30% reduction in the monthly mortgage payments relative to the traditional mortgage payment.

Some readers might consider this a government give away. However, if the central bank was trying to target nominal aggregate demand (nominal income targeting), then the fact that nominal GDP is 7.8% below its target means that the central bank will be trying in the future to get nominal GDP back up to its nominal GDP target. To do so, the central bank will need to increase nominal GDP 7.8% in addition to the long-run growth rate in real GDP and the “targeted” inflation rate of 2.5%. Thus, if the central bank was committed to a nominal-GDP target, then if the central bank meets its target eventually, then nominal GDP will recover which means that through quasi-indexing, the principal will also recover.”

I am certainly no expert on the US housing market, but to me this seems like a great idea for a US housing rescue package.

——–

Note:

QRIMs are Quasi-Real-Indexed Mortgages which “index mortgage payments to one and only one of the two causes of inflation. That cause is aggregate-demand-caused inflation. QRIMs share an advantage of its cousin Price-Level-Adjusted Mortgages (PLAMs) in that the initial mortgage payments are smaller than with conventional mortgages making the mortgages more affordable.”