How to Help Both Homeowners and Lenders, at No Public Cost

I really like this idea from the Office of Thrift Supervision: it looks like it can reduce foreclosures and help provide liquidity to struggling mortgage lenders at the same time. Here's how it works: take a borrower who's underwater, with a mortgage for more than their house is worth. Refinance the mortgage so that it comes down to the value of the house, and then give the lender a tradeable warrant for the difference. Mortgage payments come down, because the mortgage has come down, and the lender, if it needs cash, can simply sell the warrant on the secondary market. If the house gets sold for more than the value of the new mortgage, the excess goes in the first instance to the warrant holder; the homeowner makes money only if the house is sold for more than it was bought for.

The big problem, as I see it, is securitization - the legal obstacles to doing this with a securitized loan are huge. But they may not be insurmountable, especially if this scheme is shown to work for mortgages held by a lender.

Bob Lawless is more skeptical: his problem is that the homeowner has very little incentive to maximize the sale price on the property. I have three responses to him:

1. If you're under water on a non-recourse mortgage, you already have no incentive to maximize your sale price. This changes nothing.
2. The homeowner does share in the upside, so long as the house is sold for more than it was bought for.
3. In any event, the whole point of this plan is to prevent people from putting their houses on the market in the first place, and rather to find a way to help them to stay in their houses.

I reckon this plan is definitely worth a try. If it catches on, it could be very helpful indeed. And the great thing about it is that it can all be done unilaterally: there doesn't need to be any legislation first.

Comments

[Chuck Allen]

At last, a proposal that has merit for both the lender and homeowner!

Now, let's see if someone can make it happen!

Chuck Allen

[WAKEUP]

Meanwhile, back at the ranch, the price of houses continues its free-fall. So, the primary item, the house, is worth less, all the time. What is the next step, in this slow waltz down the garden path?

[Fed up]

Just asking. How do you determine the worth of the house to begin with, especially in this kind of market? If you use a price that the house would actually sell at, I don't know if anyone would agree to it.

[erx]

Idea has promise, but fedup is right - how would we price this broken market? And who would decide?

In my area, houses are mostly just NOT selling at offer prices well below any of the official published price numbers. What these houses are 'worth' is a mystery for now.

[kumar]

i think this solution is not practical either, there are a lot of questions remain
True the lender gets a certificate, how can the lender sell it in the secondary market, and who is going to buy it.
How does it get securitized, how are investors going to trust these sub-prime warrants.
Do the current home owners get a loan that is equal to the market value of the house? , if they dont qualify then do they get a loan that they actually qualify for based on their income ( this will lead to a much bigger valued certificate )

I think none of such approaches help in the long run, because the truth is that home prices have reached an unsustainable level at most places.
They are not sustainable in relation to incomes and assets in most areas

I think the best way , is to let free market forces prevail, the home owners who are under water right now , do not have a lot of stake in the house , since they havent put a lot of money down MUST walk away from their homes and rent instead. Its better for them to hand over the keys and cut their losses now , since they will be paying more towards interest and little towards equity anyways.
The lenders, investors in mortgages , speculators must take the fall for this, some genuine unfortunate home owners will be effected, but thats unfortunate.
Any bailout , plan etc , will lead to bigger problems later on.
Its better to suck it up, take the loss, learn and move on.

I am sick of the financial induced bubbles that have been recurrent recently, it seems to effect every one else except the perpetrators of these non-sense.
The bonuses of these wall-street whizards keep going up and up, whether the company is going good or doing atrocious as whats happening now, thats because they KNOW that they will get bailed out all the time. Its time that the govt must not intervene and let them pay for their stupidities

kumar

Kumar

[Augustus]

I'm sick of all of the nutty palsn to bail out the buyers of overpriced or over leveraged homes.

How about this plan:
Make the Sellers - those who got the money from the Buyers - give it back. Make it apply for the last five years. Or, hell, let's go back to the end of WWII.

Anyone who has a house that is not worth what they paid for it can request that the seller give them enough money back to get them even with current value. And they can do that indefinetly. New appraisal and another bill for the seller every year.

When that seller gives them the money back, the seller will get a note and perpetual lien on the house that gives them first right to any gain beyond where they have bought it down.

That makes about the same sense. Except, it was actually the seller who did benefit from the high selling price. As long as they bought another overpriced home and can do the same with their seller, it will was out among those buyers and sellers. those who tried to take the money and run - the ones who failed to buy again to keep the bubble inflated - will simply have their profits taken.

Before anyone complains - the post is supposed to be sarcastic nonsense. But it really is no more nonsense than the OTS proposal.

[JohnnyBitchdog]

Agree with the practical problems mentioned.

Also, clearly the value of any such warrant would be based on estimating when it might be converted to cash. The present value of this future cash flow would be much less than the theoretical warrant value based on the writedown amount.

So even if there were a market for the warrants that's a big problem

Then there will not only be low incentive for the seller to get full price in order to maximize the warrant holders value in a theoretical future sale, but there will be all sorts of side deals to make sure that the value is captured locally by the owner and the buyer.............

But the most ridiculous and horrible thing about this plan is the simple act of rewarding people that failed to buy a home they could afford or participated in fraud. This would further instill a sense that in America crime and stupidity does pay, and would cause honest thrifty and deliberate Americans to be disadvantaged at the expense of greedy fools.

jbd.

[NoFate]

This might work if house prices were allready stable, but they will very likely fall alot further. This results in:
1) The warrents being useless.
2) The owner still ending up underwater.

This slows down the inevitable by lowering the mortgage payment for a while, but that's about it. Eventually the owner will still probably walk away.

What scares me is the bank bail-out floating around congress these days. They essentially want this ...except they want FHA insurance to cover any further drops below current market price.

I didn't know so many bankers were communists!