In the middle of an article discussing the likelihood that homeowners who are underwater in their mortgages would just walk away and turn over the house to bank, the NYT tells readers that: "doing nothing about underwater mortgages could encourage more walk-aways, dealing another blow to a fragile economy." It is not clear on what evidence the NYT is basing the assertion that more people defaulting on their mortgages would damage the economy because none is presented. In fact, this is likely to benefit the economy since if people stop paying mortgages on homes that have fallen in value since the collapse of the bubble, and decide to rent instead, it is likely to free up thousands of dollars a year for each family. If millions of homeowners made this decision it could lead to tens of billions of dollars in additional consumption, providing a substantial boost to the economy. The decision of homeowners to walk away might be bad news for banks, but it is good news for the economy. In this respect it is worth noting that the Obama administration's mortgage modification programs are likely hurting the economy by encouraging underwater homeowners to keep paying mortgages that far exceed the rent they would pay on a comparable unit. In addition, these programs use taxpayer dollars that could in principle be used for health care, education or other important purposes.
--Dean Baker
