Thursday, February 19, 2009

More on the Foreclosure Plan

The last two posts might give the impression that I don't support mortgage modifications. I actually do support aggressive modifications. I just think the plans being offerred so far delay rather than prevent foreclosures, and are less fair and effective than plans that involve reducing principal.

My biggest problem with the Obama plan is that its modifications are based on a % of the borrowers income rather than the value of the underlying asset. Income should only be used to determine if you qualify for a refinanced loan - not the terms of the loan. Not only does the income basis make it into a welfare-type program, income is volatile so long-term subsidies could be based on short-term swings in income. I could get a long-term subsidy because of temporary job-loss, decrease in commissions, family leave, education leave - or not get a long-term mortgage subsidy due to a short-term increase in income.

If the refinancing focus was on principal reduction with a shared-appreciation mortgage (meaning that in the event of a future sale that results in a capital gain, the homeowner shares the gain with the lender/taxpayers who facillitated the original principal reduction), the amount of sharing could be a function of the original downpayment. For example, you could make the share of future appreciation the homeowner keeps 2.5x their original downpayment (up until the point the forgiven principal is fully repaid). Thus, 100% financing speculators are ineligible, 10% downpayment would keep 25% of future appreciation, 20% down would keep 50% of future appreciation, etc.

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