If this is the way to stop the profligate from mailing in their keys, the old Wall Street adage rings true on Main Street: "Bulls make money, Bears make money, but Pigs make more money than anyone."
"The Federal Housing Administration began Hope for Homeowners on Oct. 1, aimed at making as many as 400,000 mortgages affordable. Under the program, lenders will refinance loans to 90 percent of a house’s current value, automatically giving the owner 10 percent equity.
The loans will be insured by the government, which will take a share of any gain when the house is sold. If a sale occurs in the first year, the government takes it all. The second year, it takes 90 percent; and so on down a sliding scale. After five years, it takes half the gain."
WTF? I don't have a problem with helping people manage their bad bets if that's going to stabilize the housing market. But why give away the upside?
Would not a better plan be to create a personal recourse lien on the real estate, that accrues no interest (aside from some kind of indexed adjustment which is capitalized), requires no monthly payments, and is only repaid upon reversion?
An example: Joe the Dishwasher bought a $500,000 house with no money down during the bubble. Joe's house is now worth $400,000. For some strange reason he's now unable to pay his mortgage. Miraculously, dishwashers can support payments on a conventional $400,000 mortgage. Let’s recast the mortgage to $400,000, and continue getting payments from Joe. The $100,000 for which we’ve shown forbearance will be returned to us later as part of the reversion, or if there’s still a deficiency, we’ll garnish Joe’s wages. This keeps Joe locked into his house, he doesn’t want to carve up that fat dishwasher paycheck.
The current plan is partly a subsidy to business to artificially create labor mobility, and mostly a farce to prop-up property prices. Joe can now dump his castle for $360,000, walk away clean, and all the denizens of the ‘hood will see their assets re-priced accordingly. Once again, they’ll petition FHA to forgive and recast their mortgages under the threat of Jingle Mail, and we’ll continue our spiral down.