As the housing crisis enters into its fifth year we’ve heard far more smoke about mortgage modifications that actual burning a portion of principal balances. Politicians of all but the most liberal stripe have been hesitant to attack the issue, seeing modifications as a win to the reckless borrower and a loss for the hapless investor. What if we constructed a scenario whereby mortgages were brought down while still providing a chance for the investor to recoup some of his losses? Could such a program provide positive incentives for both borrower and lender behavior?
I propose a simple solution. Write down the mortgage to 100% of today’s assed value then allow lenders to recapture some percentage of the appreciation when the house is sold. While this may seem like a daunting task, sites like Zillow have mounds of data the banks could use to quickly implement such a program. Allow the lender to make an offer and the borrower to accept the proposed value. Homeowners who want and have the ability to stay in their house see their home emerge from the water.
Such a program creates a win-win proposition. The homeowner is building equity - both by the application of his payments to principal and his share of the property’s appreciation. The lender gets performing assets with write downs no greater and potentially much less than foreclosing with the potential for appreciation in the years to come. Furthermore, make the program a model of government done right by providing strong incentives rather than forcing action by government fiat.
Large bold steps are the only ones that will arrest a crisis so large. Interim measures are too small and lack incentives for the banks and servicers to pursue modifications over robo-foreclosures and other nefarious schemes. Let’s take action that can reduce the uncertainty currently surrounding the mortgage morass.
