Sometimes there's a fairly simple answer to what appears an unsolvable problem, and it's right in front us. The foreclosure crisis is Exhibit A.First let's describe the problem:
Stressed homeowners: Millions of Americans have been – and are being – thrown out of their home because they could not afford their loan payments. Some of those folks bought more expensive homes than they should have, some lost their jobs, some were sold teaser loans that started out with a low monthly payment but have since doubled, or even tripled. As the housing crisis deepened the balance on those loans are now, more often than not, higher than the actual current value of the property itself.
Stressed lenders: With their own capital depleted and real estate valuations continuing to fall, banks are reluctant to make new loans. They are equally reluctant to renegotiate what loans they still hold since any downward valuation of loans on their books would only further deepen the bank's losses. On the other hand, foreclosing and repossessing homes results in losses as well, on average of about $60,000 per property in most states, but in California can be closer to $100,000 loss for the bank per foreclosed property. So, for lenders, they face loses any way they turn.But there is a way to mitigate these loses and, for stressed homeowners, reduce the fear of eviction from their own home.
Here's how – what I modestly call, The Pizzo Plan – would work:
A homeowner who has been faithful in his/her payments over time, has lost one of the family's two jobs and is now three months in arrears on their $3675/month payment on their three-bedroom suburban home, because they just lost their job.
The lender contacts the borrower with an offer; the lender will renegotiate their relationship with the borrower so that the borrower can stay in the home.
The process begins with the homeowner signing a Quickclaim Deed temporarily relinquishing their ownership claim to the property to the lender.
In return the lender signs a lease/purchase agreement with the borrower. Under the terms of this lease the purchaser's monthly payment would be adjusted downward to match market rents for similar homes in their market area. (After all, if the bank throws this family out the home they will have to rent one to replace it. So the assumption is that, if they're going to rent another vacant home anyway, why not keep them in their own home where they have a stake in the future.)
Moving the defaulted borrower from loan payments to rent should cut their average monthly payment by nearly half -- and in some cases even more than that.
The homeowner/lessee's new, lower monthly “rent payment” would be divided into two parts; one third of it would be put in a special, interest bearing escrow account at the bank where it will build up over time. When the homeowner/lessee gets back on his/her feet, and is able to resume their mortgage payments, the money built up in this escrow account could be used to reduce the outstanding principle on the original loan, or used to supplement their loan payments going forward.
The other two-thirds of their lessee payments would go to the bank to reduce their loses on the loan.
(At the time of reinstatement the bank and borrower will have an opportunity to renegotiate the terms of the original loan as well, further reducing the likelihood the borrower might default again.)
There would, of course, be the usual kind of landlord/tenant mutual responsibilities, with a few differences due to the unique circumstances. The tenant/owner would be required to maintain the property in good condition, but would also have to pay to fix anything that breaks during the lease period. In fact the only material change in the homeowner/lessee's life would be the lower monthly lease payment.
The lender would, to some extent, have to become a property manager, a role bankers despise. But, at a time when REOs (Real Estate Owned -- repossessed homes.) already litter lender's portfolios, and more are on the way, they're going to end up managing properties anyway. The only question is, will they be occupied or vacant. And will there be a tenant there to take care of the yard, or will the lender have to pay a gardener to do it instead.
No one is going to get everything they would like out of this. The homeowner would not be bailed out, the bank (or Freddie & Frannie) would still have to sustain loses, just less. And, not every defaulting borrower will even be able to afford the market rate rent and will end up being evicted.
On the other hand, it would help millions. And everyone would gain something. If widely adopted it would produce significant benefits, financial, emotional and fiscal. It would make the current down turn less painful, less destructive and shorter in duration, because:
* Millions of Americans would be able to stay in their own homes.
* Banks would avoid being saddled with tens of thousands of vacant homes.
* Banks could avoid having to absorb the large, painful and the inevitable loses associated with REOs
* Millions of foreclosed properties would not be dumped to become a glut on an already staggering housing market, properties that would only drive home values further downward causing even more loses for lenders down the road.
* Neighborhoods would not become vacant-home ghettos, destroying the sense of community that's so vital to healthy families and healthy local economies.
This plan would not save every homeowner, every lender or eliminate all loses for all involved, including taxpayers. What it would do is reduce loses, reduce stress, reduce hardship, reduce homelessness, reduce suicides and reduce the impact and duration of the current depression.
What it won't do is satisfy the appetite of that yawning black, sucking hole that has become the mortgage backed securities and related derivative markets. They won't like The Pizzo Plan one little bit. But then, do we really give a fig what they think, the very people who caused, aided and abetted and profited by perverting mortgage securitization markets?
(Yes, that was a rhetorical question.)
