It may be simpler than the banks would have us believe. In places like Phoenix and Las Vegas, home prices have fallen by up to 50% from their peak. In Arizona and Nevada, more than 50% of mortgages are in negative equity.
Yet when banks foreclose, they receive an average discount of 35% below the mortgage value – a huge and unwelcome loss. What to do?
Most homeowners prefer to stay in their homes, even with negative equity. However, with hemorrhaging unemployment and a revival of consumer demand still well beyond the horizon, these homeowners are often tempted to default to rid themselves of crushing mortgage payments.
Yet a simple yet elegant solution may exist if government and banks can get together and agree on a pragmatic approach. Banks should write down mortgages to current fair equity values, thus removing the default impetus from many homeowners, most of which will fight to stay in their existing homes. Mortgage payments should then be temporarily set at interest only rates (for, let’s say, another 3 years or until the recession fully dissipates). Thereafter, capital repayments are slowly reintroduced via 15 (or, preferably, 30) year minimum time periods.
This approach would help preserve private home ownership whilst protecting the financial strength of banks and homeowners. The capitalist caveat for this largesse, this seemingly socialist policy, is two fold.
First, these new mortgages should have a floating principle pegged to the value of the house. Every year, this principle gets adjusted up or down according to the housing value index most applicable to the local area, until that value reaches the principle associated with the original mortgage (adjusted for any and all capital repayments over the years). This way, the bank has an almost guaranteed way to ultimately be reimbursed for its full principle (and not a fraction thereof in the case of foreclosure). At the same time, the homeowner must only pay interest on the actual current value of the house, incentivizing them to respect the mortgage and preserving the relationship between bank and owner. Foreclosures would reduce dramatically, with housing prices retracing their decent.
Second, the government should loan an appropriate proportion of monies at negligible interest rates to the banks to compensate for their equity write downs, for as long as necessary (but, hopefully, on an ever reducing basis). A relatively cheap solution and almost surely reimbursable, this approach would alleviate the government from taking over 100% of the loans, or possibly bailing out the banks themselves.
The home-owning status quo would be more easily preserved, home prices would be stabilized, the banks current average of 35% write-downs would be curtailed, and negative equity would evaporate, with the banks receiving “balloon” equity participation as home values rise.
In short: a win for all parties by way of an unusual yet simple solution. Why not?
Leslie J. Sacks
Published on SlantRight
Published on News Blaze
