Wavepacket Blog

Wavepacket Blog
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Mon May 17 21:31:39 2010
A Modest Proposal
One way to fix, or at least alleviate, the mortgage crisis.

Don't give it all back to the banks.
Image courtesy of Gregoryj77 (wiki)

Today there was news that people are dropping out of mortgage assistance programs. Some of that article was a bit troubling, such as this quote from one person who did finally get assistance. This is how she saw the banks behaving:

"They kept calling me and asking me to send the same things," she said. "I felt like they just wanted to run me around until I got so frustrated that I gave up."

I wouldn't be surprised if many banks dragged their feet. Why would they give up the chance of an income stream? Even with government assistance, banks don't have much financial motivation to make the program successful. Anytime you have a program that is counter to important participants' self-interest, it is usually doomed to fail, no matter how well-intentioned.

Some underwater homeowners are getting a permanent modification to their mortgage. But many others are being forced to foreclose or make a short sale.

So how about if we had a mortgage assistance program that was actually in everyone's best interest?

The best idea I've been able to come up with would be to have banks receive an equity share in the home.

For instance, if your mortgage was 20% more than the house was worth, instead of having you just walk away, the bank would take a 20% equity stake. You could keep paying back the mortgage for what you owed. Later, when you sold, the bank would take a 20% cut of the sale.

Another problem is people who took out mortgages that are too big. Those homeowners are now facing mortgage payments that they can't pay. One option may be to have the bank adjust the principal down in return for an equity stake.

This could be a good option for many homeowners since they would still have a lot of equity in what should remain an appreciating asset. And for banks, they have a chance to recoup some of their losses later as homeowners sell.

I think this plan should require that the banks allow people to buy them out, so people would have the option to buy back their equity at any time.

Obviously, with a sizeable long-term equity stake, a bank will be sensitive to what a homeowner does with the home. For instance, what sorts of renovations are made, and how the house is kept up. But banks already care about that! If you have mortgage, then there are already restrictions on what you can do with the home.

I don't think this would fix everything, but I think that in some situations both banks and homeowners may be interested.

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