A recent news story (US Plans more aid for jobless homeowners, August 11, 2010) and John Carney's Op-Ed on Fannie Mae and Freddie Mac (Too big not to fail, August 11, 2010) contain the seeds of a good idea for the solution to the foreclosure crisis. Mr. Carney notes that overlooked suggestions for reform include encouraging banks to partner with homeowners in shared appreciation mortgages. Included in the additional aid are funds to enable "local aid groups to provide [interest free] bridge loans of up to $50,000 to eligible borrowers to help them pay mortgage principal, interest, insurance, and taxes for up to 24 months.
Let us combine these two ideas into a government financed and administered program. Our experience going through middle men for the government guaranteed student loan program was an expensive mistake.
Let the government absorb Fannie Mae and Freddie MAc and give them a new role. Entering into shared appreciation mortgages with distressed homeowners. With this version of a shared appreciation mortgage, the homeowner would pay what he or she could, the government would pay the rest.
With such a scheme there would be multiple winners:
* mortgage holders would get their promised stream of payments,
*government would finally get some traction in reducing the rate of foreclosures -- nothing has worked so far because getting multiple mortgage holders to agree on modifying the terms of a mortgage is virtually impossible; over time government might even build up some positive equity in the houses it co-owned,
* homeowners would continue to live in their homes,
*towns and cities would continue to enjoy vibrant neighborhoods.
All around it seems a sensible way to go.