It seems that buying into the banking system with preferred or common shares is perfectly fine to maintain our financial institutions but that a wholesale bail out of individual mortgages is not on the table. I propose a simple fix: Offer every conforming mortgage, regardless of lender, neighborhood or participant, the opportunity to receive up to a 20% buy-down of their mortgage balance directly by the government.
The bank would receive the funds from the Treasury and the mortgage payments would immediately be reduced by up to 20%. That part of the debt would be erased from the bank’s balance sheet – since the depreciation is what made the asset toxic – lots of breathing room. The amount would be no more than two trillion and represent a far better investment than buying the entire note. Before you choke, keep in mind that the average cost of a foreclosure is north of $75,000 and each one adds yet another house to the inventory.
An independent system of regional valuations would be established to determine the average appreciation of conforming loans in a specific area. The loan would be due in ten years or at the time of sale. The government would be repaid on its investment and the appreciation determined by the valuation on the sale date; point to point, with an objective valuation system. The new loan would represent a preferred share and subordinate the lender’s remaining note. The government would get paid back first (that’s you and me), the bank next and anything that might remain for the owner.
The infusion would be direct and support the bull’s eye of the problem. It would effectively mitigate the majority of the recent deflation and give the homeowner an opportunity to keep the home, albeit with a partner, and stay in the game. Staying in the game historically makes him a more responsible citizen which was, after all, the point of the riotous loan expansion.
There is no obligation to participate and no discrimination whether it be by lender, neighborhood or participant. No appraisal, few loan documents – simple. No one can reasonably complain other than to cry socialism.
Home ownership is a good thing but the jump from 65% to 69% in a few years’ time was inappropriate. Now the deed is done and the homes can’t be put back in their boxes and sent to another country, so they need to be occupied by as-responsible-an-owner-as-possible. Beautiful no, practical yes and crying foul will not do this nation any good.
This program may well mitigate the need for judges to bend contract law, banks to write a lower-profit, the homeowner to lose what little remains of his net worth and, most importantly, millions of foreclosures. Of course the risk of default does not go away but is surely lessened and, indirectly fortifying the banks for the loss is so much less efficient. Socialistic? No more than Medicare.