akasidney

Hottest Potato in Washington: The Homeowner Bailout Plan

Rick:
While the country certainly has no interest in propping up inflated housing prices, it does have an interest in slowing to the degree possible the default rate through treatment of the disease, not the symptoms. There are different ideas out there as to how to do that, and the followng is a very simple way to do this that does not distort or 'prop up' the market, reward the financial imprudence of homeowners, cost U.S. taxpayers 100's of billions of dollars, or require all of the mortgage based financial instruments to be untangled in some fashion. Also, it allows mark to market accounting to coninue to be used, and possibly most importantly allows all mortgage based assets to be valued once again, thereby recapitalizing those who hold them, restarting the markets of them... and guaranteeing their repayment.

Sounds too good to be true, of course... but it's not. All that is required is that government enter as a 'partner' with the current mortgage holder in order to make the monthly payments. It turns out that nearly all the mortgage defaults are on adjustable rate mortgages (ARMS') after they 'adjust'. In exchange for giving up any claim to any increase in the house value over time and continuing with their original low payments, the government renogiates with the mortgage holder a new lower ARM rate in exchange for guaranteeing them the payment. If you do the math, that would amount, even in it's greatest possible value (on ALL the outstanding ARM mortgages, some 4 million homes) to approximately $1.5 billion a year... hardly even a bridge to nowhere in the national budget. When the house is ultimately sold, the proceeds would be split between the parties to the degree of their investment, with the only caveat being that the original owner doesn't share in any value above the value of the original mortgage. As houses traditionally are held for longer periods of time than that which we could expect it to take for the national economy to be rebuilt, the government should do fine... and the original owner will keep their house. If any owner chose not to avail themselves of the offer, of course they have no partner to split any increase in asset value with.

Because, as I stated above, the payments on the mortgages would be guaranteed, the value returns to all of them, and the huge Credit Default insurance market that is killing companies like AIG would disappear in a second (no defaults), restoring the asset values of companies, 're-capitalizing them' in the same way they were 'de-capitalized'... through asset revaluation.

It is absolutely in the interest of the Nation to do something like this that can quickly and completely clean up the problem caused by the bursting of the bubble. It will take possibly 10 to 20 years for many of the more hard hit markets to recover their value... but they will, and in an orderly, market driven fashion.