July 21, 2009
Time for a New Mortgage Plan
Posted Jul 21, 2009 11:35am EDT by Henry Blodget in Investing, Products and Trends, Recession, Banking, Housing
The general consensus these days is that Obama’s mortgage modification plan has failed. It’s too complex, there’s too much resistance from banks, and there are not enough resources in place to rapidly restructure existing terms.
So, what’s the answer? Just let millions more homeowners default?
No, says professor Luigi Zingales, of the University of Chicago’s Booth School of Business.
Zingales’ answer is something similar to the debt restructuring that bankrupt corporations go through: debt-for-equity swaps in which not only monthly payments but actual principal owed is reduced.
In professor Zingales’ plan, homeowners who are more than 20 percent underwater on their mortgages would have the right to reset the value of the loan to the house’s current value — in exchange for giving half of the future upside to the bank.
From the bank’s perspective, this plan would have the same drawback as today’s mortgage modifications: It would force an immediate writeoff. But if homeowners were given the option, the banks wouldn’t have any choice.
(This would have the added benefit of banks having to come clean about the health of their balance sheets and the value of their loans.)
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