Why can't the government simply payoff everyone's mortgage to resolve the housing crisis?
Could it be done? Yes, it could, subject to local law. A variant of such an approach has been suggested for those countries experiencing collapse of demand. One might consider whether whether it applied to secured loans (such as mortgages), unsecured loans, or both; whether it would be capped at a certain absolute (say £100k) or proportional (first 50%) of each mortgage; whether it would cover first homes only, or all homes; and so on.  These details would radically change the feasibility and consequences of any such intervention. See the related question: https://economics.stackexchange.com/q/146/104 Such a policy of debt cancellation would have several consequences beyond initial stimulation of demand, that would need additional policies to deal with them. Inflation The resultant surge in demand would, in the absence of any other intervention, result in a massive surge in inflation. There are some interesting questions about whether this burst of inflation would be a one-off, or not. One could make an argument that as housing has become much more affordable (at least for home-owners), it would increase the downward pressure on wages, which would be in itself counter-inflationary in the medium-long term. Nevertheless, it would be injecting much more money into the economy than has been seen in QE to date, so the risks would be of extraordinarily high inflation, which might or might not get entrenched. In order to manage the short-term risk, and long-term inflation expectations, it might be necessary to incorporate a lot of tightening, either fiscal (higher taxes and/or lower public spending), or monetary: (higher interest rates, unwinding QE, new requirements for higher core capital for banks) Moral hazard There are risks of moral hazard for individuals: however, as a society, we were prepared to accept the moral hazard for financial institutions and their staff, so that may or may not be an issue: it is likely to be a question of long-term expectations. If the expectation is that this is at most a once-in-a-lifetime occurrence, then the consequential risk from moral hazard ought to be lower. Excess profits to lenders Lenders will typically work on the basis of a certain proportion of defaults, so paying off all loans effectively gives them an artificial boost to their profits. Worsening balance of payments There is to a degree a prisoners' dilemma facing nations here. Pressing the reset-button on personal debt across many of the countries experiencing demand-collapse would benefit all of them. However, if just one such country were to do it alone, they alone would increase domestic demand, resulting in a large increase in imports, but no significant increase in exports. "Just looking at the practicality: Because the total value of outstanding mortgages in the US is about $10 trillion, and the government can't afford it without printing enough money to cause hyperinflation. The cost of saving the banks was actually much less than the ""hundreds of billions of dollars"" that is quoted, because most of it was loans that have been or will be repaid, not cash payments." "Interestingly, ancient Judaism and Christianity held a Jubilee year every 50 years in which all debts were forgive, slaves were freed, etc. ""The land must not be sold permanently, for the land belongs to me. You are only foreigners, my tenant farmers."" -Leviticus 25:23 Jubilee would more resemble ""the government declares all mortgages and credit card debts void"" with FDIC caping the payouts when banks fell into receivership, not simply ""the government pays off all mortgages"".  Yet, it still demonstrates that primitive societies employed tools similar to what you describe.  There is surely all manor of interesting analysis of the economic impacts of Jubilee by Jewish religious historians.  You might even find arguments that communism was invented because Western Judeo-Christian societies abandoned Jubilee. As an aside, I'm surprised that nobody here directly discussed the velocity of money.  If you wipe out a mortgage, you might convert a spender into a saver, especially during a recession, meaning you've injected slow money.  Conversely, anyone too poor for a mortgage probably spends all their money, meaning giving them a job injects faster money.  In addition, it's much cheaper to hire tons of poor people to do useful things, like repairing bridges." Government purchases of mortgages simply transfers the debt burden from households to the sovereign. Taxes pay sovereign debt (65% of whom are homeowners anyway). No debt has been restructured -- it's now paid via taxes instead of monthly mortgage payments -- and those paying include persons who responsibly avoided housing speculation. The U.S. has a debt-to-GDP ratio just shy of the critical point of 90%. Purchasing $10 trillion in mortgage debt (about a year of GDP) would put the U.S. on an inexorable path towards insolvency and inflation. There are all sorts of other risks (loss of a risk-free asset, moral hazard, nationalization of the housing industry, etc.) but this should make the point clear that it's not a good idea. There are only three ways to reduce debt: 1) default, 2) restructure, or 3) lower the real debt burden by de-valuing currency in which the debt is denominated. I think Energy and Mike point out the some serious issues but the prospects for the futures also need to be considered. If the banks no longer have those loans then they need to rebuild their income base that is wiped out by the payoff of their loans.  They would be incentivised to make a large number of loans so that they could quickly reestablish their base so they can maintain profitability.  This is likely to lead to more poor lending practices that lead to this location in the first place.  The high earning heavily leveraged would benefit far more from this than the poor.  A function of income is that as it increases the ability to leverage increases in a non lineal fashion.  So single person making 250k a year(the benchmark set by the current administration) with a 2 million dollar mortgage(probably underwater currently) on a home would benefit much more than a family of 4 making 50k a year with a 100k mortgage.   Assuming that government does pay off all mortages now people can sell of their now fully paid homes for less than their value, as its basically free money, leverage that money to move into a better home, so home values actually crash, in some areas as people sell them off cheap, people try to gamble on cheap houses(like we just saw), etc.  It takes a market that is on the verge of recovery and stabilization and shakes it up.  How long before it stabilizes again would be a matter of debate but I would not expect to see it in less than a decade.  Business and the Economy thrives on stability and retreats from instability.  So while this would appear to be an injection to the economy the chaos it creates would likely actually severely retard future economic growth. "TARP was ~$475 billion of loans to institutions.  Loans that are to be paid back, with interest (albeit very low interest).  A significant percentage of the TARP loans have been (or will be) paid back.  So, the final price tag of the TARP was only a few $billion (pretty low considering the scale of the program). There is ~$10 trillion in mortgage debt outstanding.  That's a much higher price tag than TARP.  Secondly, paying off the mortgages = no repayment to the government as there was with TARP.  The initial price tag of your plan would be ~$10 trillion, instead of a few $billion. Furthermore how does a government with >$15 trillion in debt already come up with an extra ~$10 trillion to pay off people's mortgages?  Should the government go deeper into debt?  Print more money and trigger inflation? (Note:  Some people like to talk about a ""secret bailout"" by the Fed, implying that the true cost of TARP was much higher than claimed by the government.  The ""secret bailout"" was a series of short-term low/no interest loans to banks.  Because they were loans, which were paid back, my point still stands.)  Some other issues to consider: Remember that the principal balance of your mortgage is only a small portion of your payments to the bank.  Over 30 years, you pay a lot of $$$ in interest to the bank (that's how banks make a profit).  Banks are expecting that revenue, and it is factored into their financial projections.  If those revenue streams suddenly disappeared, I expect it would majorly screw the up the financial industry. Many people bought houses during the real estate boom, when housing prices were inflated far beyond the ""real"" value of the house.  Is it right to overpay for these houses?  This rewards the banks for accepting the inflated value during the appraisal process.  (Loan modification forces banks to accept the ""real"" value of the house.) The financial crisis was triggered by people buying houses they could not afford.  Should they be rewarded with a free house for making poor financial decisions?"
tl;dr: when everything is going great, it's not really a problem. It's when things change that it's a problem. Finally, home loans are extended over extremely long periods (i.e. 15 or 30 years), making any fluctuations in their value short-lived - even less reason to be obsessed over their current value relative to the loan. Your post is based on the assumption that you never move. In that case, you are correct - being underwater on a mortgage is not a problem. The market value of your house matters little, except if you sell it or it gets reassessed. The primary problem arises if you want to sell. There are a variety of reasons you might be required to move: In all of these scenarios it is a major problem if you cannot sell. Your options generally are: In the first option, you will destroy your credit. This may or may not be a problem. The second is a major inconvenience. The third is ideal, but often people in this situation have money related problems. Student loans can deferred if needed. Mortgages cannot. A car is more likely to be a lower payment as well as a lower amount underwater. Generally, the problem comes when people buy a mortgage assuming certain things - whether that's appreciation, income stability/growth, etc. When these change they run into these problems and that is exactly a moment where being underwater is a problem. "**Put aside the politics?**  That's laughable for an article that is nothing BUT politics.  For starters the artificially false conflation of *everyone* as if their behavior were homogeneous, when in reality it is a full spectrum (there are many people with not only ZERO debt, but substantial assets, including very productive assets).  Ergo the argument that there is some egalitarian ""solution"" to this by treating everyone the same way... is in fact a POLITICAL assumption (and a very biased one at that)." "I refuse to vote for Mitt Romney but I don't see what's wrong with his position in this instance. Homes are way too expensive currently and helping people with underwater mortgages would be akin to propping up unsustainable home prices.  The only way to fix the housing market it so value homes at a value that people are willing or able to pay. Given the wage deflation going on in the USA coupled with a good portion of an entire generation of new home buyers saddle with a mortgage sized student loan debts, it's ridiculous to think current home prices represent the ""bottom"" of the market." "Just like foreclosing is less than optimal for the banks, a tax sale has drawbacks for the county.  At a minimum, there the manpower needed to process the foreclosure and sale, and in many cases the value for which the property can be sold is probably less than the taxes due.  The problem is this flies in the face of the ""personal responsibility"" talking point that many bankers have been spreading since the beginning of the financial crisis.  It's a moral failing for a homeowner to walk away from an upside-down mortgage, but when the bank does the same thing for a tax bill it's a simple business decision." I believe the reason is because society and the economy is set up a certain way, and re-enforced by the government. Your options are: So, people usually go with the most attractive of their limited options, getting a mortgage. If you want to dig deeper, do some research as to why housing is expensive. Some things to consider: you need the government's permission to build houses, thus limiting the competition in the home building market, the housing bubble, artificially setting house prices, etc.) To summarize: people need mortgages because houses are expensive, and houses are expensive for many reasons, big ones having to do with the government. "It's a problem from hell because all solutions have drawbacks/unintended consequences and because they are all pretty complex to implement in practice.  Breaking up the big banks so that no bank is enough to bring down the economy with it is the strongest move, but is riddled with problems when you start looking at it practically. How do you determine the ""maximum size"" a bank should have? Should it be based on assets? Systemic importance (i.e. interconnectedness with other banks)? How do you enforce it? Banks will find ways to offload assets, etc. into special purpose corporations to get around the laws somehow. How do you compensate for the fact that size does help financial efficiency in some ways?  Imposing higher capital requirements is the next solution. But that too is not so easy to implement with full success in practice. What should be classified as a low-risk asset? How much capital do you require against a CDO vs a Mexican government bond? How often do you need to revise these standards? At what point does the cost of higher capital requirements start to strangle lending and financial flows?  The weaker maneuvers are things like constant government-imposed stress tests, orderly resolution mechanisms, higher standards for internal risk management practices, etc. but those may not be adequate and also have their implementation problems." I agree. Money has been funnelled to the top and debt on the those at the bottom for so long people just can't afford to buy a house. Student loans are as expensive as a house. Who can afford two payments like that? Preparations for inflation that is not going to happen anytime soon is preventing much needed currency from being injected into the system.  The deflationary pressures are so strong that less and less currency is being circulated, as people fear for the future.  They save more and spend less, because their neighbor's out of work, and they might be next (if they are lucky enough to still have a job).  That's not to mention that huge mortgage that they bought into, and are now massively underwater with.  With that, they are constantly removing chunks of currency from circulation.  When everyone is taking chunks out, the demand for currency rises, and demand for goods and services dies, creating an ever deepening hole.  So yes, I think the government should be making major purchases, damn the deficit.  Fiber to everyone's home, absolutely massive funding of clean energy research and projects, combat infrastructure decay, etc etc.  Labor and resources are cheap right now, and leaving all these people with stagnating skill sets by the wayside with no options creates an exponential decrease in productivity.  We have the methods to control inflation when and if it rears it head.. high taxation and high interest rates.  Let's burn that bridge when we get there.  The U.S. budget does not work like a household, as alluring as this analogy is.  There is no paying back the deficit, and there will never be a problem paying the interest on a a currency we can make more of at any point.  The real limitation here is inflation, and we have none. All this may be true but rampant fraud was not at the core of the housing crisis. Middle managers fired because Human Resources could do middle manager work on management software for low wages -- that is the core of the housing crisis. Fired middle managers who were paying their home loans walked away from their homes because they no longer were able to get a high paying job to pay for those homes. The middle class of lower populated Canada is greater than the middle class in the U.S. today. As a former manager of hundreds of home loan officers, I should know. And so what was the logical alternative?  How does Hank Paulson:  1.   Get $150-300 billion dollars into the hands of individual taxpayers so that they don't default on their home mortgages and wipe out the banking system?  2.  Make sure the $150-300 B is going to individuals who actually need the capital, weren't bad actors in taking on too much debt and causing everyone else significant harm by engaging in risky borrowing?  3.  Sufficiently protect the $150-300 B in loans so that the US Gov't can get paid back and not have it be some massive giveaway of taxpayer dollars?    And all this had to be done within a matter of days.  Ontop of which, why aren't you railing against the irresponsible automakers who didn't pay back their TARP loans and instead were forgiven, while the banks paid back their loans in full with interest and a profit to the US Taxpayer?  The automakers and the unions basically got free money (after Obama came into office and under his direction) on the back of the taxpayer.  Isn't that crony capitalism when unions who are Democratic sympathizing voters get loans that are ultimately forgiven by the federal government?  The whining you make about private entities like Berkshire, who did nothing to create the crisis and merely took advantage of it, with little to no help from the federal government is remarkable.  It's like straight out of a socialist playbook. Pay the the smallest balance first. The sooner you pay that off, the sooner you can pay more on the mortgage. "I think a big part of the issue is ignorance. For instance, the US govt cannot default on its loans, yet you keep hearing people speak as if it could. The US govt also does not have to borrow to pay for anything, it creates its own money whenever it wants. These 2 facts often evade many people, and they feel the US govt should act like a household, business, or a state govt. This disconnect leads to a lot of confusion, and things like ""fiscal crisis"". Just remember Rahm Emanuel - don't let a crisis go to waste.  Disclaimer: this is not to say the US should create money whenever it wants without thought. However, the simple fact is it can. For those interested in more, check out Modern Monetary Theory (MMT). Its economic study in a world not based on gold standard, or convertible currency (fiat currency)." No. Bank of America helped out during the financial crisis by buying Merrill Lynch (I am not suggesting they did this for altruistic reasons, just trying to describe the position they were in despite already purchasing Countrywide). They were forced to accept TARP but they paid it all back by the end of 2009. If the IRS fucked up their math like BofA is suggesting then they deserve to be compensated.  Edit: Countrywide is one word. Because people are going deeper into debt and filing for bankruptcy more often, there is more risk on behalf of the credit company.  Therefore, they limit their risk by lower limits and increasing interest. For every person that goes bankrupt, there might be 10 that pay that new higher interest rate, thereby netting a profit even though they lost out completely on the one customer. The recent legislation limited how and under what circumstance rate are adjusted and raised, but not forbidden. As for the fact that these banks took tax money under the idea (we all thought) I see two points of view. We never should have had the credit we did, so they are correcting and you (like me and millions of others) are suffering for their prior mistakes.  It is an honest attempt to correct the system for long term stability even if we suffer in the short term. We gave them tax money, they need to not screw us over.  In response to the still frozen credit markets I would suggest penalty taxes to companies that do not lend. Penalties to companies that do not modify mortgages.  The second you take government money is the last second a you are entitled to a profit of anything.  Furthermore, we the people bought you and we the people get to decide your salary. The bottom line is there is truth in both statements.  Things are totally screwed up right now because we ALL made mistakes in the past trying to get a bigger profit or own a bigger house.  There are those among us who didn't make a mistake, and those among us who made nothing but mistakes.  As a society, we have to pay the piper either way. The best thing you can do now is pay down your debts, live simply and spend your money wisely. The core competency of banks is to lend money from depositors and re-lend that money to borrowers.  They do not have the expertise to develop real estate.   They have trouble evening managing foreclosed real estate, such that they have to sell them at a discount.