Economics focus: A helping hand to homeowners

"Some economists think the credit crisis needs to be fixed at its source—in America’s housing marketGOVERNMENTS across the rich world have taken drastic steps to save the banking system. As the fears of outright collapse recede, their focus has turned to improving the supply of credit to households and firms by pushing market interest rates down and encouraging banks to lend more freely. But a growing number of economists, and now the Bush administration, believe that the credit crunch also has to be addressed at its source—in America’s housing market, where prices have fallen almost one-fifth from their peak, and foreclosures have soared (see chart).Two features of housing finance make the crisis hard to resolve. The first is “no-recourse” home loans, which are standard in America (though not elsewhere). If a borrower defaults, a bank can claim back the property used as collateral, but nothing more. When the value of a home drops below the size of the mortgage, a borrower has a reason to default to escape his negative equity. ..." (2008-10-23)

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