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?"
"I dislike this argument that government pressure to make bad loans is the origin of subprime loans.   In fact, the term subprime is because those type of loans can't be underwritten by the government.  Usually the concept of government forcing bad loans, is government forcing banks to give minorities and low-income people loans for their first houses.   The government requires w-2 income and a base credit score to procure these loans.  At the peak of the bubble, the majority of home sales were for investment purposes, not homeownership purposes.   Those who declared the housing market was wildly unstable (and who were proven right) were talking about the problem of mortgage brokers being incentivized to lie about a person not being qualified for prime government loans, in order to make more money by putting them in lucrative subprime loans (or simply advising them they were better off in subprime and could get cash out up front!).  Also, liar no-doc loans were booming and speculators and house flippers were getting multiple properties in order to flip them for profit.  Once upon a time these speculators would make sure they could rent out the house for the carrying costs if they needed to.  0 down, 0 interest meant a whole different speculatory ballgame.    Ah, but maybe these speculators wouldn't have anyone to sell to if low income people couldn't get prime loans from the gov?  All evidence points to them selling to other speculators until there was no fool left to hold the bag.  See: Miami, Las Vegas, etc.  EDIT:  I forget that the argument has hopscotched from Fannie &amp;Freddie, to the end of redlining, to the CRA, and now to changes made to the CRA, where the argument finally gains a bit of traction: &gt; Law professor Michael S. Barr, a Treasury Department official under President Clinton,[63][131] stated that approximately 50% of subprime loans were made by independent mortgage companies that were not regulated by the CRA, and another 25% to 30% came from only partially CRA regulated bank subsidiaries and affiliates. Barr noted that institutions fully regulated by CRA made ""perhaps one in four"" sub-prime loans, and that ""the worst and most widespread abuses occurred in the institutions with the least federal oversight""  Further, the discussion devolves into whether the idea and enthusiasm of the rest started as a seed from the regulated banks, how much removing risk by Wall Street with non-government backed home loans through credit instruments had its origination in the CRA, and how much of the failure of ratings agencies to properly rate those credit instruments has to do with the US government and the CRA and not regular Wall Street greediness.  So originally I stated ""no relationship"" but yes, once you get into the complexity of it all I'm sure we could find a way to say a global mania in speculation in real estate is due to the American government getting poor people into their first home, and generally has nothing to do with the human condition of wanting something for nothing and getting excited when the government allows you to sell blue sky returns to foolish speculators." Understandably, it appears as if one must construct the flows oneself because of the work involved to include every loan variation. First, it would be best to distinguish between cash and accrued, otherwise known as the economic, costs. The cash cost is, as you've identified, the payment.  This is a reality for cash management, and it's wise that you wish to track it. However, by accruals, the only economic cost involved in the payment is the interest.  The reason is because the rest of the payment flows from one form of asset to another, so if out of a $1,000 payment, $100 is principal repayment, you have merely traded $100 of cash for $100 of house. The cash costs will be accounted for on the cash flow statement while the accrued or economic costs will be accounted on the income statement. It appears as if you've accounted for this properly.  However, for the resolution that you desire, the accounts must first flow through the income statement followed next instead of directly from assets to liabilities. This is where you can get a sense of the true costs of the home.  To get better accrual resolution, credit cash and debit mortgage interest expense & principal repayment.  Book the mortgage interest expense on the income statement and then cancel the principal repayment account with the loan account.  The principal repayment should not be treated as an expense; however, the cash payment that pays down the mortgage balance should be booked so that it will appear on the cash flow statement. Because you weren't doing this before, and you were debiting the entire payment off of the loan, you should probably notice your booked loan account diverging from the actual.  This proper booking will resolve that. When you are comfortable with booking the payments, you can book unrealized gains and losses by marking the house to market in this statement to get a better understanding of your financial position. The cash flow statement with proper bookings should show how the cash has flowed, so if it is according to standards, household operations should show a positive flow from labor/investments less the amount of interest expense while financing will show a negative flow from principal repayment.  Investing due to the home should show no change due to mortgage payments because the house has already been acquired, thus there was a large outflow when cash was paid to acquire the home. The program should give some way to classify accounts so that they are either operational, investing, or financing. All income & expenses are operational.  All investments such as equities, credit assets, and the home are investing.  All liabilities are financing. To book the installment payment $X which consists of $Y in interest and $Z in principal: To resolve the reduction in principal: As long as the accounts are properly classified, GnuCash probably does the rest for you, but if not, to resolve the expense: Finally, net income is resolved: My guess is that GnuCash derives the cash flow statement indirectly, but you can do the entry by simply: In this case, it happily resembles the first accrued entry, but with cash, that's all that is necessary by the direct method. &gt;  If you can't grasp why bankruptcy has different implications, and thus is handled differently, for incorporated businesses, then (facepalm) you don't get it.  Care to explain?  AA screwed over their creditors by filing Chapter 11 - and will likely screw them over with more bankruptcy filings.  A homeowner walking away from an upside-down mortgage screws over his creditor - the bank.  Why is one action more moral than the other?  On a side note, house price collapses hurt individuals a lot in this country given that the home represents the majority of most people's wealth.  If your house falls 50%, you are hurt for life.  You might have thought after you paid it off you could live it in the rest of your life with the aid of a reverse mortgage.  Not as easy with such a pricing collapse. "In both cases, you have a bunch of assets that pay into a trust, and a set of rules determining how the payments are distributed to bond holders.    Typically, the bonds are split up by ""Seniority"" where any losses from the underlying assets gets recognized by the least senior bond holder first, and the most senior is protected until those below in seniority are wiped out.  In the case of mortgage backed securities, you have a lot of early payoffs (sales and refinances), and those payoffs tend to pay off the senior bonds first (though in practice, quite a bit more complicated than that)  CDOs tend to have bonds as assets that pay into the trust, and CMOs have mortgages.  CDOs used to be more likely to be things like corporate debt, or junk-rated debt.  But during the housing bubble you did have CDOs backed by some form of mortgage backed bonds.  If you build a CDO out of tranches of CMOs, you are going through multiple stages of tranching, and things 'get weird' when you have highly-correlated loss behavior in your underlying assets.  The Equity position or the residual, as it is sometimes called, is whatever money coming from the underlying assets isn't owed to any bond after all of the structuring rules are followed.  This would be interest received in excess to interest owed + money required to make up for lost principal.  Typically goes back to the issuing bank.  There is something called a NIM bond that gets carved out of the residual and pays to the investment bank, I gather.  Residuals and NIMs of mortgage bonds are pretty worthless in a high loss environment like this." This article is 100% incorrect. The governments main concern is to PREVENT depositors and tax payers from losing funds in the case of bank default.  How?  By having debt holders being forced to converted into equity to create a capital buffer to keep a bank solvent which will help protect depositors and prevent tax payers from having to bail the banks out.  Please ask me more questions on this as I have done a lot of work on this topic as of late. I can't believe people over 25% underwater even bother paying the mortgage anymore.  By no stretch of the imagination is this a reasonable thing to do, fiscally speaking.  To those of you who would make the moral argument that you made an agreement to pay...    1.  You also made an agreement for what the penalty is if you do not pay.  Either way you're still adhering to the agreement.      2.  It's a bank loan, not a suicide pact. One big factor that no one has mentioned yet is whether you believe in a deflationary or inflationary future. Right now, we are leaning towards a deflationary environment so it makes sense to pay off more of the debt. (If you make just one extra payment a year, you will have paid off your house 7 years early). However, should this change (depending on government and central bank policy) you may be better off putting down the very minimum.  In a year or three from now, you should have a clearer picture. In the meanwhile, here is a recent Business Week article discussing both sides of the argument. http://www.businessweek.com/magazine/content/10_28/b4186004424615.htm No one can afford homes anymore. That's the real issue. Purchasing power. The next generations cant afford to buy a home because they don't make enough money and the boomers have everything already. Until the boomer generation goes away, these problems will continue to get worse.  Most people can't afford $450k new construction and have money left to live on.