Here’s an Idea: Bail Out for Homeowners, Not Just Banks

Ian Welsh at FireDogLake has a proposal for the federal government to help homeowners save their homes from foreclosure, instead of just bailing out financial institutions:

What the government should do instead is set up a Trust to buy mortgages at a discount, then reset them to 20, 30 or 50 year fixed mortgages with a reduced face amount. If the house is later sold, half of the increase goes to the government, so that taxpayers make a profit. The mortgage cannot be paid off before the end of its term so that financial scavengers cannot come around and, as they did over the last ten years, say “get rid of that mortgage, and take ours. It’s better. Honest!”, because we know that when they say better, they don’t mean better for the mortgage holder. The mortgage is attached to the property and is transfered to any new buyer. And the mortgage cannot be removed from the property, and any new mortgages attached to the property are junior to the government mortgage.

(My own modification of Ian’s idea would not prohibit paying off the mortgage early, but rather treat the writedown as a subsidized balance, and provide that any sale or refinance of the property would have to pay off the subsidy as well.  That’s the way many HUD and Rural Housing Authority loans deal with that issue.)

We don’t know yet exactly how the latest federal rescue (buying up the riskiest loans) will affect homeowners.  The Resolution Trust Corporation, which was created to hold all the bad debt generated by the 1980s savings and loan crisis, eventually sold off that debt.  A new version of that animal will do little to help homeowners, and in fact, may create disincentives to modify mortgages or otherwise work with borrowers to avoid foreclosure.  After all, if your investment in the mortgage is a fraction of face value, you may prefer to foreclose and liquidate your investment, rather than wait for payments to be made.

My own suggestion to providing help to homeowners in foreclosure is not a new one, and wouldn’t cost the taxpayers a dime–modify the bankruptcy code to allow bankruptcy courts to write down or otherwise modify the terms of home mortgages to reflect market conditions, whether that means a drop in value, declining interest rates, or other factors.  After all, the bankruptcy courts can do that now for business assets, vacation homes, and a host of other things.  That was one of the provisions of the Foreclosure Prevention Act, which was defeated in the Senate earlier this year.

Unfortunately, I’m afraid you and I are not considered “too big to fail.”

I

Related posts:

1. Fannie and Freddie Can’t Afford To Bail Out Subprime
2. Should The Government Bail Out The Mortgage Mess? Renters Say No Way!
3. Banks Want Your House But Not Your Problems