March 20, 2012

Housing: A Virtual Foreclose & Buy Back Approach

The housing market is in a bad situation. By bad, I do not mean that prices are down. When stockmarket is down, we say, "It's a great buying opportunity". I am not talking current median home prices, per se. They can go up or down, that's what a market implies. Here we are talking about the market itself having become defunct. That is, there is supply, but sought to be suppressed. There is demand, but not able to express itself because prices are still too high. If the true supply is unleashed, the prices might crash to a point where nobody wants to own a house, even those that have one!

People were sold, or somehow bought, homes that were priced too high, sometimes with the help of adjustable mortgages, that had an interest-only teaser rate in the beginning years. The idea behind buying these homes was that they would be even costlier tomorrow, so buy now, and "lock in this great price!" Upon a reset of mortgage payment, if the income just isn't there to pay the new monthly figure, sell the house for a profit.

The game eventually collapsed like a house of cards that it was. The question is now what can be done about the underwater loanees. A pure mass foreclosure - market clearing - purge drags the home prices down for even those that are not in trouble, and gives them a stomach upset. Besides, banks are forever hopeful that if they wait it out, they might not have to foreclose and firesell houses for what they think is a pittance.

Yet individual responsibility and facing the music for one's imprudence is the best anchor for a robust society. Is there a way out that encourages people to stay in the homes that they bought, rather than dumping their underwater properties onto the banks enmass? Yet one that does not reward stupidity? One that makes the imprudent collect the losses for their bad choices, yet does not flood-juggernaut the market with properties that otherwise would stink due to abandonment by erstwhile mortagees and bankers trying to avoid writing the loss into their books upon resale?

There might be a way - one that enables an underwater homebuyer to purchase his home all over again, the earlier downpayment is forever lost, but there is also no hit to credit rating. This is how it can work:

The bank and the homeowner work out and agree upon the new market price for the house. The owner puts in 10% of the new price and the bank foregoes another 10%. Now, the loan outstanding on the buyer is reset at 80% of the new market price, provided the buyer can show ability to pay the new fixed monthly mortgage.

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