How do we stem the flood of foreclosures without upfront taxpayer government money?  How do you get current homeowners out of trouble and protect the investor?  You must find an incentive for all parties to participate. 

Go down the list; Homeowners need to reduce their mortgage payments.  Investors holding the note cannot be forced to write off equity lost in a decision in which they played no part.  The government cannot keep throwing money at the problem and the Wall Street bailout is taking too long.  Additionally, it has only helped banks until now.  One wonders who really wants to fix this.  Everyone does … so you have to design a plan that has something for everyone.  See the attached image as an illustration.  You may have to download it and zoom to make it legible.

I have made some simple assumptions to illustrate how this would work (see the attached worksheet).  Assume an original purchase of $750,000, a 5% down-payment then, an original rate of 7.50% and a value drop of 15% since that purchase.  The trick is to find a way to incentivize the investor holding the note to allow an adjustment.  One hope program today will finance 90% of the current appraised value and the current 30 year fixed rate is 5.50% … so adding a tax policy can fix the problem.  The new mortgage would then be $538,000.

On the chart I created, the homeowner would save $144,000 in principal and interest payments over seven years and three months - the average home ownership period.  If policy makers would allow the proposed 4.50% to be used for refinancing (and not just purchasing), the homeowner would save $180,500 in principal and interest over the same period.  (BTW: Ireland has had a mortgage rate of 2.25% for years - why can't we have what they have had for years?  They just raised it to 4.25%)

The trick is to give a tax incentive to the current note-holder to 'defer' the Deferred Mortgage Balance that the homeowner would/could repay over the seven year period.  The Deferred Mortgage Balance would remain as a lien on the property and a lien on the homeowner credit report - clearly identified as such - so credit applications would clearly isolate that item.  The investor could write off a depreciated balance of the Deferred Mortgage Balance over the seven years against income on all other performing loans.  This would amount to approximately 4 times the Deferred Mortgage Balance.  They would realize a book profit by deferring the note (assuming a corporate rate of 35%) … and that Deferred Mortgage Balance is repaid eventually.  The investor would have to agree to the Deferred Mortgage Balance amount being interest free and payment free.  We are only talking about approximately 5% or 10 % of all mortgages in default or trouble.

You also give a tax incentive to the homeowner when payments are made to reduce the Deferred Mortgage Balance.  If the home is sold - any remaining balance of the Deferred Mortgage Balance is 'attached' to the homeowner and 'attached' to any new property they purchase.  It is never 'gifted.'

Remember; it is all 'monopoly money': what real estate takes away, real estate gives back.  It would only take a 2.35% increase in value of the home annually over 7 years to get back to the original purchase value.  Go back twenty five years and you will see significant value improvement.  How does 500% to 600% increased value sound to you? Real estate will give back what it takes away.

There is no 'gift' paid to bad or coerced home-buying decisions.  Many of those in this position were just unlucky to hit a peak and need assistance to survive the swing.  Those who are current on their mortgage will not have any Deferred Mortgage Balance to repay at sale.  That becomes their reward.

Everyone wins and NO taxpayer is needed.  Got a better idea?  Let's hear it.

ps:  Forgive the Realtor photo … but I do not like any others I have.