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Megan McArdle

Cities Grabbing Houses Won't Fix the Market

Mortgage principal reductions are one of those policy ideas that never dies, or goes anywhere. The theory is simple enough: One of the biggest predictors of default is being underwater -- the value of the house being less than the mortgage -- so if you do a principal reduction, you lower the risk of default. You also prevent some related problems, including people who can't move to take a better job because they're underwater on their mortgages. All else equal, that should goose the economic growth rate a bit, especially now, when unemployment is so high.

The politics are equally simple: You take money from bankers and bond investors, who are relatively small in number, and give it to homeowners, who are many. It's electoral gold for a politician who can pull it off.