House of Debt: SRM and the New Architecture of Mortgage Debt

This text sheds new light on the causes of financial crises, tracing their origins to a sharp decline in consumption among highly leveraged mortgage debtors. As household net worth declines, the high marginal propensity to consume causes their spending to shrink rapidly, impacting both the tradable and non-tradable sectors. The authors present Shared Responsibility Mortgages (SRM) as a solution – a new debt architecture that automatically adjusts principal repayments based on local property price indices. This mechanism not only protects the debtor from a cycle of default but, above all, acts as a systemic safety net, stabilizing aggregate demand and protecting the entire economy from a deep recession and the negative effects of mass auctions.