Richard's Real Estate and Urban Economics Blog: Two strong ...

(1) It finally allows underwater borrowers to exercise an option that investors knew existed when they purchased mortgage backed securities--the prepayment option. Right now, the fact that borrowers are underwater allows investors to earn a windfall by collecting a premium on what is effectively a callable bond.

(2) It imposes a Pigou tax on large banks. When a small bank fails, the negative externality is small to non-existent. When a TBTF bank fails, the negative externality can be catastrophic.? Taxes on large banks help internalize the externality.

Source: http://real-estate-and-urban.blogspot.com/2012/02/two-strong-positives-for-new-obama.html

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