Fake Home Ownership and the "Other Greenspan Put"

Brad DeLong likes to offer ten good economics stories every day. From today's lot, I pick one: fake home ownership:

I saw an ad on craigslist (though most story that starts with that line are shady, this one is not especially so) for apartment rental opportunities in Sacramento, CA. The rent was very cheap, but you had to post a gigantic security deposit, sign away rights related to eviction and give proof that you’ve never been convicted of a crime. Digging a bit deeper, it was clear that the owner was an out of state company that was buying up sections of foreclosed homes in abandoned neighborhoods. And what they needed was less a “renter” but a controlled “squatter.” If left alone, these buildings would become homes for the homeless, gang activity, looters and pranksters, etc. So what the investment company wanted to do, since they wanted to sell the properties as homes in the long run but couldn’t in the short run, was get someone to squat in these buildings for them; they were looking to hire a respectable squatter, get him on the payroll through really cheap rent, and he or she who could do whatever in the building as long as it wasn’t destructive of value. I think that’s a good metaphor for what homeownership is like with a regime of subprime loans. I like discussing this because it blurs the line of the ideals of homeownership of the late 20th century – a yeoman ownership society where nobody ever washes a rented car – with something more feudal. We’ve had this discussion before, but it only focused on the way up – what’s interesting now is we can begin to play with a theory of fake homeownership on the way down. ....

There's more; go read the whole thing. This is great but there's an underlying issue here that deserves more general consideration than it receives. So: Rortybomb's core point here seems to be the idea of asymmetric risk--the heads-I-win, tails-you-lose nature of mortgage debt, such that (vastly oversimplified) a Californian who owes more on its home than it is worth can simply throw the keys on the table and walk away (you could call it a "Greenspan put," but that term is already taken.

Fine so far. But let me suggest that this asymmetry is hardly limited to home ownership: it's shot through the whole realm of commerce. The same asymmetry is the very stuff of the option market: indeed many (=I) have remarked on the fact that the underwater mortgage can be thought of as a kind of out-of-the-money call option, where the option holder may hold or fold as the numbers dictate.

And of course. there's limited liability corporate debt. The finance types long ago figured out that the equity claim on the leveraged balance sheet of a limited liability corporation is another option--a call option the assets, with the strike price being the debt.

And there is the whole universe of "contract" non-recourse debt, where the creditor agrees to look only to the asset for satisfaction of his claim, and not to the deeper pockets of the residuary owner.

And don't get me started on the bankruptcy discharge...

I admit I don't really have a clue as to how these basic components fit together. But it does seem there are some underlying similiarities and we might gain some insight by comparing them.