Right now, there is a good government plan to address the housing problem. There is talk of allowing judges to reduce the principal on mortgages. In my opinion, this plan is unfair to banks and unfair to people that borrowed reasonable amounts of money.
Here is my plan:
If I take out a $700,000 mortgage, and can’t pay it, have the bank (or the government, if they buy the toxic loans) break the loan into 2 pieces:
- The first piece is a hypothetical $300,000 loan (although this number could vary). The $300,000 loan would have a 0% rate and no principal payments due.
- Create a new mortgage with favorable terms - $400,000 loan with 30 – 40 year life and a low 4.5% - 5.5% fixed rate.
If I ever sell the house, and the house sells for more than the $300,000 and $400,000 loans (whatever their balance is), I keep the profit.
If I try to sell the house for less than the two loan balances, then I first must offer it to the bank that holds the two loans.
This plan makes homes more affordable, but doesn’t allow for a free ride (with the exception of the favorable lending rates). I think it is a win-win; more people can stay in their homes, and banks will have less foreclosures to deal with.
If no one adopts this plan, then an alternative would be to give the banks an option to buy on the homes where principal balances are cut. In this case, homeowners can’t double dip, where they get a reduced principal balance but in 10-15 years can sell for a profit. The option would be indefinite, and the bank would benefit from any price appreciation.
These plans offer more fairness to all parties than any other plans I have heard. At least a dialogue on the topic may produce better answers than the government has to offer.