More Rules to Avoid Another Housing Mess
Posted April 18th, 2008 at 11.24am in Entrepreneurship.
As Congress mulls what it can do to untangle the housing mess, it should take care to limit its largesse to helping only those people who really need help. We’ve already noted that Washington shouldn’t rush to bail out vacation homes. Or frauds. Or lenders who winked at frauds and gave them loans anyway.
Help should also come with a very important string attached: no free lunch. Any borrower or lender must be required to have a substantial stake in any loan refinanced with the backing of U.S. taxpayers. Unless borrowers and lenders stand to lose some of their own money if a refinance goes south, there’s no reason for them NOT to make the deal – no matter how risky it is.
But risky deals are what got us into this mess in the first place. If Congress opts to use taxpayer money to back bad-risk loans, there’s little chance of success. Borrowers and lenders will take the money, get a few months of “breathing room,” and then walk away from the refinanced deals that should never have been made in the first place. The only difference would be that the new deals leave taxpayers stuck with paying off their bad decisions.
Here are some rules to keep that from happening:
1. All loans refinanced by taxpayer dollars will require down-payments (“skin in the game”) from the borrowers. Equity that is a gift from lenders is not the same as a real down payment.
2. Borrowers who take out these loans, then declare bankruptcy, will still be required to repay the taxpayers (in other words, they can’t just walk away).
3. No 100 percent federal guarantees. Lenders need to put “skin in the game,” too, at least 30 percent of the loan amount.
For more insights into the housing crisis and what Congress should and shouldn’t do about it, click here.
- Author: Maggie Pitts
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September 10, 2008 Kevin Delaney, Utah writes:
I was thinking that an interesting way to resolve the Mortgage Mess would be to switch from a system of mortgages to a system of shared ownership: (blog post).
In the mortgage model, people take out a loan and owe money on that loan. A shared ownership model is more like the stock market. The bank would own a portion of the house. The person living in the house would gradually buy larger portions of the home (or land under the home) at market rates.
Shared ownership shares the risk and rewards of ownership with the investor that buys a share of the ownership.
One could resolve the current mortgage mess by taking the at risk mortgages in a region, reconfiguring the loans as share ownership products then sell bundles of ownership in stock market type auctions.
As the bank and home owner are sharing the risk, shared ownership reduces the need for re-insurance programs like Fannie Mae and Freddie Mac.