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A monthly archive: September 2008

# articles in archive: 18

       24 Sep 2008       


Subject: Econ_Policy     A proposal for the mortgage crisis

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A proposal for acquring distressed mortgages

Basic ideaHomeowners facing foreclosure get to have their loan principal renegotiated to an appraised value. However, the loan owner get a lien worth the difference between this appraised value and the original loan amount.

This lien gives them first right on the portion of revenue from a future sale of the house that is above the appraised value.

Example
If the loan amount is $400k, and the appraised value is $350k, the loan principal is reduced to $350k.
If in t years the homeowner sells the house for $380k, the homeowner gets $350k (minus whatever is owed on the principal), and the lien holder gets $30k.
You could tweak this a number of ways.
  • the lien should probably be treated like a loan, so it increases at the rate of interest (thus, in t years the lien would be worth 50 *r^t k$, where r is the interest rate (i.e. 1.06).
  • The lien would still be attached to the house after sale, so the new owners would be responsible for it, typically minus the amount over the sale price (ie. the $350k) that they paid (ie.; assuming r=0, after applying $30k to the lien, the new owners would have a $20k lien) *
  • The homeowner can always pay down the lien as desired.
  • To encourage the original homeowners not to trash the place, the loan owner could rebate a portion of this "profit" back to the original homeowner. Say, 20%?
  • The loan holder may end up being the feds, or whoever the feds sell it to. Or, the liens could be seperate from the loan owner. So if a speculator wants to bet on rising prices (and the homeowner eventually selling), the loan owner could recover some of their losses immediately.
The idea is to help the na´ve, but not necessarily duplicitous, dopes who bought these houses in the first place. And to slow down overly large drop in housing prices due to a bump in supply caused by foreclosures. But in a way that doesn't punish the prudent renters who have been waiting for prices to drop. And also giving the banks (or mortgage holders) some hope of recovery

Posted by Daniel Hellerstein at 10:01:01 Add comment || View 0 comments