The government is hoping to pressure bankers into reducing the mortgage payments to be made by distressed homeowners (U.S. to Pressure Mortgage Firms for Loan Relief, New York Times, November 29, 2009: A1, A21).
Bankers have already demonstrated that they have no shame, so such pressure is futile. There are also structural impediments to companies being able to do what the government wants. The mortgage servicers have a fiduciary duty to the mortgage holders and would have to get their permission for any downgrading. As each mortgage has been diced and shredded into multiple derivative products, each mortgage has a multiplicity of owners. It may well be impossible to get them all to agree to a downgrading.
It is time for the government to take a straightforward step: Enter into agreement with each distressed homeowner to replace the current mortgage with a Shared Appreciation Mortgage with the same terms (dollar amount, interest rate, payment terms, etc). The homeowner will pay what he or she can, the government will pick up the rest of the mortgage bill. Over time, both homeowner and government will build up equity in the home and will share in any gains when the house is eventually sold.
This is a win-win-win-win: for government which will finally be seen as doing something for ordinary people, for investors whose income stream is maintained, for homeowners who can stay in their houses, and for their communities which no longer face the blight of foreclosures.
Let's do it now!
Sent to New York Times