The Difference Maker

Posted at 3:19 pm on Thursday, March 5, 2009, in Uncategorized, and tagged economics.

I agree with the notion that the mounting number of foreclosures is partially at root of our current economic crisis. It is by no means the only reason. Equally culpable for the dire straits that we navigate was the need for a market correction, the house of cards that became of the banking industry, and corporate greed, among others.

I am hesitant to write a blank check to troubled homeowners — although I do not think a “blank check” is what the Obama administration is envisioning — because I feel that a large number of those who may receive this extraordinary federal aid will immediately look for a way to sell their house. In other words, a large number of people still have no intention of living in their home. For those who would stay in their homes — ten, fifteen or twenty years, or more — I have little doubt that reducing their monthly payments now, keeping them in their homes, would have a beneficial impact on the economy.

But how do you make sure the taxpayers do not get ripped off? Here is an idea: the difference between the original mortgage principal and the renegotiated principal is due the U.S. government upon sale, if applicable. For example, if I purchased a home and opened a mortgage for $500k, never paid a dime in principal and stopped paying interest, allowed the federal government to step-in and renegotiate my principal to $300k, and then I sold my house for $500k three years later, I would owe the difference (the amount I never paid) to the U.S. government, in this case $200k. As a nation, we would be able to set this money aside for a scholarship fund or for public health or for research (but not for sending a man to the moon).

I would be much more comfortable helping my neighbor buy his house if I knew that when the market rises again (because it will, history tells us), he cannot take advantage. The reason is a house is an investment, a non-guaranteed investment, and the value may go up or down, or up then down, or down then up. If any homeowner is able to reduce their mortgage principal based on today’s deflated market (due to federal government intervention), then everyone should be able to.

Maybe there should be a time element to this, similar to the phase-out for previous stimulus rebate checks or vesting with a company’s stock options. For the first five years, the government gets 100% of the difference, the next three 80%, the next three 60%, the next three 40%, the next three 20%, the next three 10%. That means if you live in, pay for, and continue to purchase the house over a period of 17 years or more, you get to keep all the profits from the sale of the house (based on a mortgage principal that the federal government intervened on your behalf and artificially lowered).

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