One way out of this mess

[Glenn Black]

Where is the flaw in the following proposed solution?

The government offers any and all homeowners the same deal: The government will pick up a percentage of the monthly mortgage payments, or make a lump sum payment to the mortgage holder (if permitted under the terms of the mortgage) for a % ownership in the home on an equitable basis, plus a "Rescue Premium" for the owner's folly.

The homeowner stays in the home, has responsibility to maintain the home in a reasonable manner, pay property taxes, etc. If the owner default on these responsibilities, government can force exit via Power of Sale or foreclosure, & delinquint owner is abandoned to fend for themselves, and government has full recourse against all of delinquent owner's assets (if any).

If owner subsequently abandons or defaults, government can assume owner's position by continuing to pay mortgage.

When the owner decides to sell the home in a bona-fide arms-length sale, the government gets their share of the proceeds, or losses.

Non-bona fide, or non arm's length proposed sales can be vetoed by government, or government has right of first refusal at same terms offered to buyer.

Would this work?

If it won't work, why not? Can anyone suggest a better scheme?

[Chomsky]

Re: One way out of this mess

Why can't we just let overextended borrowers default and go rent, again?

[cjppjc]

Re: One way out of this mess

No I want the local taxes to be paid by the Govt. See how they like it.

[Rajiv]

Re: One way out of this mess

See my comments here and here

[Starving Steve]

Re: One way out of this mess

Where is the flaw in the following proposed solution?

The government offers any and all homeowners the same deal: The government will pick up a percentage of the monthly mortgage payments, or make a lump sum payment to the mortgage holder (if permitted under the terms of the mortgage) for a % ownership in the home on an equitable basis, plus a "Rescue Premium" for the owner's folly.

The homeowner stays in the home, has responsibility to maintain the home in a reasonable manner, pay property taxes, etc. If the owner default on these responsibilities, government can force exit via Power of Sale or foreclosure, & delinquint owner is abandoned to fend for themselves, and government has full recourse against all of delinquent owner's assets (if any).

If owner subsequently abandons or defaults, government can assume owner's position by continuing to pay mortgage.

When the owner decides to sell the home in a bona-fide arms-length sale, the government gets their share of the proceeds, or losses.

Non-bona fide, or non arm's length proposed sales can be vetoed by government, or government has right of first refusal at same terms offered to buyer.

Would this work?

If it won't work, why not? Can anyone suggest a better scheme?

I like your idea because (at a reduced value to the property worth) it puts real estate backing behind the govn't mortgage. Hence, the govn't could rescue some deadbeat homeowners and still come-out making a profit in the deal. Also, the risk of setting-off an inflation is reduced.

All U.S. paper money should now be backed by real estate including federal lands. This is the way the U.S. and all nations should go because it is a very workable solution.

[blazespinnaker]

Re: One way out of this mess

I like your idea because (at a reduced value to the property worth) it puts real estate backing behind the govn't mortgage. Hence, the govn't could rescue some deadbeat homeowners and still come-out making a profit in the deal. Also, the risk of setting-off an inflation is reduced.

All U.S. paper money should now be backed by real estate including federal lands. This is the way the U.S. and all nations should go because it is a very workable solution.

That's a pretty interesting idea, though might be a bit complicated if someone decides to turn his money in for his land.

I like the idea of the US taking an equity position in real estate in exchange for reduced payments. Makes perfect sense to me. In a way they are doing that though, by buying all the toxic MBSs.

[Mn_Mark]

Re: One way out of this mess

Where is the flaw in the following proposed solution?

The government offers any and all homeowners the same deal: The government will pick up a percentage of the monthly mortgage payments, or make a lump sum payment to the mortgage holder (if permitted under the terms of the mortgage) for a % ownership in the home on an equitable basis, plus a "Rescue Premium" for the owner's folly.

The homeowner stays in the home, has responsibility to maintain the home in a reasonable manner, pay property taxes, etc. If the owner default on these responsibilities, government can force exit via Power of Sale or foreclosure, & delinquint owner is abandoned to fend for themselves, and government has full recourse against all of delinquent owner's assets (if any).

If owner subsequently abandons or defaults, government can assume owner's position by continuing to pay mortgage.

When the owner decides to sell the home in a bona-fide arms-length sale, the government gets their share of the proceeds, or losses.

Non-bona fide, or non arm's length proposed sales can be vetoed by government, or government has right of first refusal at same terms offered to buyer.

Would this work?

If it won't work, why not? Can anyone suggest a better scheme?

I agree with the commenter who wrote that the solution is to let people who overextended themselves get foreclosed on. There is absolutely nothing wrong with them going back and renting something they can actually afford. House prices will drop back to their market equilibrium price.

Any government solution comes with side effects that end up making the problem worse than it was before. When the government gets involved it artificially skews the market price and this throws everything off. We are in this problem because the government, via the Fed's interest-rate manipulations among other things, skewed the housing market.

Government also causes moral hazard problems. The proper thing to happen, the right thing, is for people who made foolish investment decisions to pay the price. You are proposing that the government take away the sting of making a foolish decision. That means you will get more foolish decisions.

It reinforces the very harmful notion that no one should have to suffer financial loss - that the government should step in to take away the pain.

And since obviously there are way too many houses available to sustain the current high prices, the prices MUST come down. Under your plan, the taxpayer takes a hit for it. Why should a taxpayer who had nothing to do with this foolishness pay even one dollar of their hard-earned money to keep a fool in a house they can't afford?

What in the world is the big problem with letting these people go back and rent? They can't afford the house. They and the lender should take the loss, no one else.

We're not talking life and death. We're talking about where they are going to live. You do not deserve to keep living in a house you cannot afford to pay for.


That said, it seems clear that we have developed a societal norm or meme or expectation or whatever you'd call it that it would be some kind of unthinkable catastrophe if people had to actually suffer the costs of their mistakes. The expectation of a majority of the population seems to be that the government should take responsibility for fixing all social problems, including people buying houses they couldn't afford. Some lip service is given to responsibility, but that's just talk -- the government is out of control with regard to spending.

It's just plain certain that this is going to end with currency debasement and all the government restrictions and confiscations that come with that. There is no memory in this country of what it's like to live in a nation with a worthless currency. The South after the Civil War were the last Americans to know what that was like, and those folks are long gone.

That's what we're going to find out: what it's like when the currency becomes worthless.

The iTulip prediction, I believe, is for not THAT much inflation. The iTulip folks seem to still have some faith that government officials won't go all the way to complete currency debasement. And I think they might make some insignificant motions in the direction of responsibility. But in the end, the social expectation that government will fix everything is so strong now that I do not see how the government would ever be able to resist the temptation to print. The alternative would be very austere spending and very high taxes, and the people don't want that and won't stand for it. People will elect whomever promises to spend the money to give them what they want. Many or most people still think FDR fixed the Great Depression with big spending programs....so we will have bigger and bigger and bigger spending programs until the currency is gone.

The younger people, the children and teens and twenty-somethings, are going to remember this the rest of their lives, and they will make sure, like the Germans do, that the currency cannot be debased again in their lifetimes. But first we're going to get our own version of Weimar/Zimbabwe/Argentina.

[doom&gloom]

Re: One way out of this mess

I know! I know!

Let's just have the Fed print lots and lots of money. Then they can buy
up all the toxic assets on the books of the banks, see. Then the banks
can theoretically go lend money, see. And then housing will just stabilize
like magic, see. And all the losers who bought overpriced properties can
go back to flipping them like burgers, see. All it takes to solve the mess...


is a printing press.

[c1ue]

Re: One way out of this mess

The reason this plan won't work - at least for the overall economy - is the same reason the present bank bailout(s) won't work: fixing the present foreclosure problem doesn't restart the clock on the bubble economy.

If either the 'toxic debts' are nationalized and/or foreclosures stopped, the net effect is to trap huge numbers of homeowners in their homes for a generation.

This stabilizes a deteriorating and bad situation, but simultaneously prevents the future growth which would permit a final exit from a bad situation.

[swgprop]

Re: One way out of this mess

Among the other flaws already pointed out is this:

.... and government has full recourse against all of delinquent owner's assets (if any).

Why would I willingly encumber my assets and future earnings? Informed homeowners are not going to swap their non-recourse mortgage contract for a dubious partnership with the gubmint.

[FRED]

Re: One way out of this mess

The reason this plan won't work - at least for the overall economy - is the same reason the present bank bailout(s) won't work: fixing the present foreclosure problem doesn't restart the clock on the bubble economy.

If either the 'toxic debts' are nationalized and/or foreclosures stopped, the net effect is to trap huge numbers of homeowners in their homes for a generation.

This stabilizes a deteriorating and bad situation, but simultaneously prevents the future growth which would permit a final exit from a bad situation.

Looks like Gosbank USA's "Debt for Life" program.