It's no secret that the residential homeowner, as the result of the real estate bubble, is an endangered species. Some estimates are that by 2011, half or more of all homes will be worth less than their mortgage obligations. As I mentioned in a previous essay, the central culprit was politically driven artificially low rates and other market interference which incentivized home buyers to do the wrong thing.
Unfortunately, that all can't be undone. Since unemployment hasn't turned up yet, the ability to ride this out for many will become a tougher and tougher task. 401k's are being depleted, and of course taxed. Even those that were prudent, have been penalized with savings that return virtually nothing and are taxed to boot. The unemployed or underemployed are unable to even take advantage of the mortgage tax deduction, raising the net cost of housing.
So far, the administration has responded by bailing out the banks and home mortgage derivatives that were created to re-package and sell them to others. But other than an $8000 incentive for first time home buyers, a pretty small demographic, little has been done to assist the homeowner under stress. Published estimates are that 19 million homes now sit empty.
We know, or at least believe, that facilities to take these underwater loans off banks' hands have been created. We don't know how much has been deployed and in what manner because, like so much else, it hasn't been disclosed and estimates vary. So I'd like to suggest another approach.
Now keep in mind that I don't want to specify the details, just relay the concept. I call it Home Appreciation Rights and it ought to be seriously considered. Here's how it would work: The Federal Government pays off either a portion of a homeowners mortgage in the form of a lump sum or it agrees to make payments for a period of time. That way, the funds benefit the homeowner directly. It would also benefit the banks or other entities holding the distressed assets. In exchange, the homeowner tenders a portion of the appreciation in the house from above some predetermined level:. Possibly the assessment or fair market value, whichever is lower.
The homeowner would not be completely bailed out, and the upside surrendered to the government would be fractional. Therefore, if housing prices were to recover, the homeowner would keep most of the appreciation. The probability of a recovery would increase with time, which so many are running out of.
Unfortunately, one could argue that the Home Appreciation Rights concept would produce greater interference in our lives via Big Brother, but if OUR government doesn't do this, the large dollar- holding foreign governments just might. Wouldn't it better if the US gov't owned an option on the appreciation in our houses than some foreign government scooping up distressed properties? Think back to 1990, when Japan began to buy marquis U.S. real estate before their bubbles forced them to retrench. The circumstances are different this time and the purchase of sizable amounts of U.S. real estate at distressed prices might prove quite tempting.