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Tuesday, January 26, 2010

This Year's Housing Crisis

Your editorial continues to propose inside the box remedies that are proving unsuccessful (This Year's Housing Crisis, New York Times, January 5, 2010: A16). We need a more radical approach.

The truth is that it is very difficult to modify the terms (principal or interest rate) of a mortgage loan in a world in which mortgages have been diced and sliced into many derivative products. It is impossible or at least very difficult to identify the owners who will have to agree to the terms of any modifications.

There is a simple, albeit expensive, alternative: the Shared Appreciation Mortgage. With these, government could partner with homeowners having trouble paying the full mortgage: the homeowners would pay what they can, the government would pick up the rest. Each would build up equity in the home in proportion to their contribution. Over time, as housing prices recovered, the government might even make money in the deal.

This is solution that only requires agreement between the government and the homeowner; the mortgage servicers and the mortgage holders continue to get the original earnings stream; the homeowners keep their homes; neighborhoods are not devastated by multiple foreclosures; towns and ciites continue to receive a stream of property taxes.

It is sad to think that if this strategy had been followed when the housing markets began to collapse, SAMs would have sustained the value of the derivatives so big banks would not have needed direct bailouts. Wall Street and Main Street would have both been helped with the same money.

Sent to New York Times

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