Fed economists propose new mortgage option to stem defaults

Federal Reserve economists are proposing that borrowers be allowed to sell their homes and use the proceeds to pay off their mortgages, even if the property's value has fallen below that of the loan.

"Using this for the current stock of mortgages is not really feasible," Wayne Passmore, deputy associate director with the Fed board in Washington, said at an economics conference in San Francisco. "So we're proposing something going forward that we think can help."

The proposal would allow homeowners "to get a true 'clean start' by moving and would avoid the problems associated with default and foreclosure," according to a paper written by Passmore and central bank economist Diana Hancock in October. That paper was summarized at the conference by Jim Wilcox, a professor at the Haas School of Business at the University of California, Berkeley.

The "buy your own mortgage" option could only be used if a buyer leaves the home, making homeowners bear the costs of moving and losses on their downpayments, Hancock and Passmore said.

The lender would gain the house, or net proceeds of sale, making the transaction like a "credit default swap where the underlying asset is just turned over," Wilcox said.

Hancock is assistant director in the division of research and statistics.