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I found this posting on another forum. It has a few rough spots but thought it was an interesting approach to handling the foreclosure problem.
1st, let me start with some assumptions that I make about the housing situation.
The problem, as I see it, is 2 fold. How do we shift the debt burden created by the housing asset deflation, to the people who profited from the asset inflation, without crashing what we need for a financial system. And how do people who made mistakes, pay for those mistakes without ruining the rest of their lives.
Here’s the nutshell:
Example 1:
Joe the plumber is out campaigning, instead of doing plumbing, and his boss decides to cut his hours. When Joe had the spotlight on him, he went out and bought a house with an ARM that is about to reset, and no money down. He paid $300,000 and the house sold for $200,000 in the year 2000. He is about to be foreclosed on, and now discovers government is part of the solution and not part of the problem.
Joe gets his new 30 year fixed mortgage for $200,000. Joe gets put on the credit assistance list and can never get another mortgage where payments would exceed 28% of his monthly gross, he can never get more than a single $10,000 car loan, he can never take out a loan for a boat or furniture or a TV, and he must pay down his credit cards to $3,000 and never exceed that limit again.
Next month Joe finds another job in Montgomery Alabama, where he feels more comfortable, and he sells his house for $210,000. The $10,000 above the original mortgage would go to the bank and must be used to write down the "mortgage recovery asset". The new owner stays in the house for 2 years and sells it for $220,000. $5,000 goes in his pocket and $5,000 goes to the bank to write down the asset.
Example 2:
Bob, the community organizer, lives next door to Joe and has worked hard all his life and has never been late on a payment. Bob put $20,000 down on his house and owes $280,000. He knows the real value is only $200,000. He volunteers for the program and gets his mortgage adjusted to $200,000 and the bank gets the $80,000 "mortgage recovery asset" to write down. Bob decides the neighborhood is a much better place to live, now that Joe has moved to Alabama. He lives happily ever after, the house appreciates at a slow steady pace while the bank continues to write down the $80,000, and eventually the house is sold and the appreciated 50% profit the bank gets is probably enough to finish depreciating the asset.
Bob has a lower mortgage, and more disposable income to keep the economy moving, and he doesn’t suffer the credit restrictions of Joe.
Advantages:
A couple final notes. Anyone near foreclosure is required to participate in the plan, anyone else can opt into the plan. Those who opt in, of course do not suffer the credit penalties.
- The crises was caused by the greed of banksters, and Wall Street geniuses who pillaged the economy for their own personal gain.
- Some good people made some very, very, bad decisions and can not expect others to fully pay for their mistakes.
- There are no easy solutions to this problem. If we want our economy to recover so we all can once again live a fairly normal life, we are all going to have to pay some for the mistakes of the past, whether we were responsible or not.
- I don’t believe in indebted servitude for people who may have been stupid, but had no malice intentions.
- Housing values will drop to an historic norm with some overshoot, and any effort to stop it will only delay the inevitable and waste money.
The problem, as I see it, is 2 fold. How do we shift the debt burden created by the housing asset deflation, to the people who profited from the asset inflation, without crashing what we need for a financial system. And how do people who made mistakes, pay for those mistakes without ruining the rest of their lives.
Here’s the nutshell:
- All mortgages get cram-downed to 2000 median price levels or 31% of monthly gross income payment levels, whichever is lower.
- The principle difference between the new and old mortgage becomes the responsibility of the bank, but would take the form of a new type of asset with a fancy political name like "mortgage recovery asset", and it would be attached to the house, not the owner. For simplicity sake, I’ll ignore the complexities of the loan servicer, MBS’s traunches, etc, but I do believe it’s workable.
- The "mortgage recovery asset" must be depreciated over a 50 year or less period by the bank.
- Any profit experienced by the original mortgage holder from the sale of the house goes toward depreciating the "mortgage recovery asset".
- Any profit experienced by subsequent home owners, is split 50-50 between the owner and the bank.
- Foreclosure participants are placed on a list, like a no call list, where their credit is restricted for the rest of their lives so they can’t get into this bind again. Something like a single $3000 credit card limit, a single $10,000 auto loan limit, and a 28% gross income house loan, and no other credit allowed.
Example 1:
Joe the plumber is out campaigning, instead of doing plumbing, and his boss decides to cut his hours. When Joe had the spotlight on him, he went out and bought a house with an ARM that is about to reset, and no money down. He paid $300,000 and the house sold for $200,000 in the year 2000. He is about to be foreclosed on, and now discovers government is part of the solution and not part of the problem.
Joe gets his new 30 year fixed mortgage for $200,000. Joe gets put on the credit assistance list and can never get another mortgage where payments would exceed 28% of his monthly gross, he can never get more than a single $10,000 car loan, he can never take out a loan for a boat or furniture or a TV, and he must pay down his credit cards to $3,000 and never exceed that limit again.
Next month Joe finds another job in Montgomery Alabama, where he feels more comfortable, and he sells his house for $210,000. The $10,000 above the original mortgage would go to the bank and must be used to write down the "mortgage recovery asset". The new owner stays in the house for 2 years and sells it for $220,000. $5,000 goes in his pocket and $5,000 goes to the bank to write down the asset.
Example 2:
Bob, the community organizer, lives next door to Joe and has worked hard all his life and has never been late on a payment. Bob put $20,000 down on his house and owes $280,000. He knows the real value is only $200,000. He volunteers for the program and gets his mortgage adjusted to $200,000 and the bank gets the $80,000 "mortgage recovery asset" to write down. Bob decides the neighborhood is a much better place to live, now that Joe has moved to Alabama. He lives happily ever after, the house appreciates at a slow steady pace while the bank continues to write down the $80,000, and eventually the house is sold and the appreciated 50% profit the bank gets is probably enough to finish depreciating the asset.
Bob has a lower mortgage, and more disposable income to keep the economy moving, and he doesn’t suffer the credit restrictions of Joe.
Advantages:
- The burden of debt is placed on the financial institutions and products that profited so much in the past without breaking them.
- Joe pays for his mistake by being forced to live within his means.
- Bob is rewarded for being responsible with a smaller mortgage and more spending money.
- Taxpayers pick up very little of the expense.
- A new housing bubble is prevented from starting.
- Mortgage backed securities and CDS’s will finally start having a market value due to the certainty of the house values, the drop in foreclosure rate, and the 50 year write down ability.
A couple final notes. Anyone near foreclosure is required to participate in the plan, anyone else can opt into the plan. Those who opt in, of course do not suffer the credit penalties.