"This gives homeowners the incentive of returning to a positive net-equity position before their hair turns grey -- maybe even in time to pay for their children's college education," Klowden and DeVol wrote in a summary.
They estimate that the cost to Treasury (and thus to taxpayers) of saving 1.5 million homes from foreclosure or abandonment with this plan would be between $75 billion and $100 billion. That assumes the government wouldn't jeopardize the original lenders' balance sheets by forcing them to share in the cost via haircuts on their loans.
DeVol concedes that the Milken proposal would be a handout to the usual suspects in the housing crash -- mainly, California, Florida, Nevada and Arizona -- because those are the places where the negative-equity problem is dire.
So Nebraska doesn't need the program, but would have to help foot the bill.
The Milken plan would partly be aimed at a subset of homeowners who almost certainly would garner the least amount of sympathy from the rest of the country: People who might be able to continue making their payments, but who have no economic interest in their house because of negative equity.
How many homeowners in that situation would walk away? A new study by a team of researchers including Luigi Zingales, a University of Chicago finance professor, estimated that 26% of current mortgage defaults are "strategic" -- meaning homeowners chose to default even though they could afford their loans.
Based on surveys of U.S. households the study also found, not surprisingly, that the willingness to walk away rises as negative equity increases.
The Milken proposal doesn't delve into the details of how to determine eligibility for debt forgiveness, other than the basic qualification of being underwater.
Ken Rosen, chairman of the Fisher Center for Real Estate and Urban Economics at UC Berkeley, believes that, as a starting point for forgiveness, "It should only be for people who had equity in the first place." Many people, of course, did not.
Rosen favors a variation on debt forgiveness to give underwater homeowners a reason to stay put: a mortgage refinancing program that would turn some percentage of a homeowner's loan into an equity stake for the lender. If the house rises in value over time, the lender would share in that appreciation.
