While attention has been on the people who face foreclosure or are underwater (noting that owning a house where the loan is greater than the current market value does not mean you face foreclosure), attention should be given to any home purchaser since 2002 who bought in an artificially inflated market. If a HOLC/HOME operation is to avoid moral hazard, which is basically bailing out people who made bad economic choices and making non-participants liable for their bad choices, then it has to be available to any home purchaser from 2003 through anyone whose purchase closed on or before September 30, 2008. Anyone should be able to have recourse to a government renegotiation for their loan, just as the banks can get the government to bail them out - why should Wall Street have all the fun? But there are a few rules.
- The house must be the principal residence of the home owner. No vacation house, no income properties, no pure speculation buys.
- Only one bail out per buyer. If you were speculating, too bad.
- This can only address original loans, not refinances with cash out or HELOCs. Sorry, not interested in supporting your equity extraction.
- It only addresses first liens. If you have multiple loans on the house, sorry, can't help you with those.
- It does not matter what kind of loan you have. 30 year fixed, interest only ARM, whatever.
Those rules will eliminate a large bunch of buyers right there. If you aren't living there, and/or you have been using the house like an ATM, and/or you can't be helped with just fixing a first loan, mail in your keys now. Then, there is the loan itself.
- The value of the home will be calculated as its estimated worth at December 31, 2002. Why? Because that captures all recovery from the last housing slump, so factors in real appreciation (probably too much) but stops short of the market frenzy. It still leaves houses too expensive. My own house would lose about 25% of its purchase value in a case like that.
- The banks can't refuse to sell the loan back to the government and they will absorb the difference between the purchase price and the 2002 price. You guys should have known better than to make the crappy loans, sorry. It's called taking a financial risk.
- The owner has to be able to make payments on a 30-year fixed loan with 6.25% interest from their current financial condition. Those are extremely good terms. Can't do that? Sorry, can't help you, mail in the keys.
- The reduction in home loan value becomes a matter of public record.
OK, so if anyone who has bought a house since January 1, 2003 can go get this spiffy government loan, what's to keep everyone and their cousin from getting out of their debt obligation?
- If you got a 30-year fixed rate in early 2003, your rate was probably lower and the price difference between your purchase and the December 2002 cost not that much, so there is no advantage to the deal. The further you get from that date and the less conventional your financing, the more valuable the deal becomes. Thus, there is a good incentive structure. Update - also, the closer you get to September 30, 2008, the less good the deal becomes because of depreciation in homes. Thus, while open to all, it really targets people who bought at the height of the market.
- No equity extraction allowed. We're not here to give you spending money. If you've got other debt, too bad.
- If the house stops being the primary residence of the borrower, the loan is due in full, i.e., no converting to income property, no handing it over to the kids.
- If you accept the government deal, you have to hold your house for the full term of the loan. If you sell it for more than the loan amount before the end of the loan, any amount greater than the loan amount up to your original loan amount, less any down payment you put in, goes back to the government.
There is no way for the original borrower to profit off the purchase unless they hold the property for the full 30 year mortage. If the borrower dies, the estate/inheritor can take over the loan on the same terms as the original borrower, or can sell under those terms. The borrower cannot transfer title to another owner to try to get around the 30-year rule. If the borrower does hold, then they may see some appreciation in the value of the home and may have wealth to pass on to heirs. This allows the house to remain a vehicle for multi-generation wealth creation, which helps low income borrowers the most, which is the point of trying to increase home ownership in that group.
Since the government is taking the risk, the government gets the profits of anything short of full performance. You can sell at any time. You just don't get to make money from it. If you have bought the house as a residence, then this is not a problem. If you must move for job or family reasons, you will be able to sell at a reasonable price so are not trapped due to negative equity. The repricing also serves to bring housing values down all over, increasing the stock of affordable homes and hastening the return of more reasonable house prices.
This is a very high level suggestion, of course, but it tries to address how to fairly and equitably revalue the housing market in a way that does not reward the speculators and sheer idiots but provides real relief for people who actually want to keep their house.