David Lentz

Options Trader: Tough-Decisions Tuesday

Let me try once more to be clear about this -- Homer Simpson is sitting at home, knocking back a brew or six, with the thought of what is he going to do when his ARM resets? He knows he can't handle the payment, and he knows his home now has a lower market value than the balance on his loan, so he cannot refinance?

What has occurred to daye, is that the Homers of America have sat on the train tracks, watching the train approach (admittedly, some have just walked away from their mortgages before going broke), closer and closer, until they are busted, without a home or assets, and their house goes to further depress the housing industry as yet more excess inventory.

Under my scheme, Homer gets a letter from his mortgage company that tells him his mortgage has been replaced -- by virtue of the new law -- with one that locks in his current interest rate (that he is able to make the payments on) for 130 years (for example). Now Homer has no choice in the matter (unless he can find a buyer, and if he could do that, he wouldn't be in the mess he is in), but he gets to keep his home, and is not driven into bankruptcy or made homeless. He still has whatever disposable income he had before to support the rest of the economy. OTOH, he is chained to that house for the rest of his life, or until home values appreciate enough to enable him to sell it.

Cost to the taxpayer? Virtually nil. The punishment is shared by homeowners and lenders alike, as the lenders do not get the revenue stream at the rate they originally planned on. The chain reaction of imploding ARM resets, mortgage failures, lender and borrow failures would be ended.

It's easy. No hand-outs or bail-outs required.