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Saturday, February 14, 2009

Bailout Alternatives

Your discussion of the bailout seems to follow the agenda of the previous administration. Your editorial and op-ed writers talk in great detail about how to make the banks whole by removing their toxic assets (for example Max Holmes, Good Bank, Bad Bank; Good Plan, Better Plan, New York Times, February 1, 2009: 10).

You rarely talk about options that might make the banks whole and also help individual homeowners and their communities. The best option would be the Shared Appreciation Mortgage (SAMs).

SAMs are the perfect instrument to bail out lenders, prevent foreclosures and restore confidence. In a SAM, a government agency would join with the distressed homeowner in meeting payments on the mortgage. There is no write-down so that lenders and derivative owners are made whole again. There is no foreclosure so that the individual homeowner stays in his home. There is no foreclosure so that neighborhoods are not hollowed out by a proliferation of empty homes.

There is risk to the government. As time goes by, the homeowner and the government build up equity in the home; the share of equity based on their proportionate contributions. There is however no guarantee that the total equity will exceed the homeowner's original purchase price before the house is eventually sold. In the best case scenario, both government and homeowner would recover their investments; in the worst case they would not. The risk of government losses might be reduced if the government part of the mortgage stayed with the house after an underwater sale, though that would reduce the attractiveness of the house to the new owner and consequently reduce the funds received by the seller. But this would work -- the government has infinite patience; early payoff is not a necessity.

Why don't we intensively discuss this solution, or something similar (as suggested by Andrew Caplin of New York University), as part of the recovery efforts that are being made?

Sent to New York Times

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