New Deal Ideas for Stopping Foreclosures
With the mortgage crisis dragging on and no quick fix in sight, lots of new ideas to help people stay in their homes are floating around. Maybe one upside to the lack of action on stopping foreclosures is an opening for some innovation — for ways to break through the complications that seem to be holding back any solutions for troubled homeowners.
For example, here’s one such idea today, in The Wall Street Journal. It’s called a Shared Appreciation Mortgage, or SAM. Lenders would take a loss as they wrote down a borrower’s mortgage debt. But should the home appreciate in value eventually, lenders would then share in the gains. The notion was described by four economics and law professors, Andrew Caplin, Thomas Cooley, Noel Cunningham and Mitchell Engler. Here’s more:
A homeowner unable to support payments on a house purchased for $200,000 that today is worth only $150,000 might be offered a write-down of up to $50,000. But this would not be a free lunch.
With the SAM, once the value began appreciating above $150,000, the mortgage holders would be due their share. The details of the write-down and the appreciation sharing could be tailored to different circumstances. But one way to give lenders a share of the upside would be to pay back some of the write-down if the house is later sold, in the scenario above, for more than $150,000. This is a model in which both parties benefit, preventing default while giving future taxpayers a fighting chance at some real upside to the investment we’re forcing on them.
The authors contend the government needs to tackle a bold solution, and this would fit that bill.
So far, the government has been making bold moves — but only when it comes to rescuing banks. Will it do the same for homeowners? The SAM authors say there’s precedent for the government to act:
Almost 75 years ago, in the depths of the Great Depression, the nation faced a housing market collapse even more brutal than today. The federal government responded with a strategy that allowed homeowners to keep their homes and kept the bottom from falling out of the real-estate market. Unprecedented at the time, the 30-year fixed rate mortgage has since become the gold standard in markets around the world.
Today, facing a similar collapse, the federal government needs to be equally bold. SAMs are the new deal in housing that our children need.