An underwater mortgage proposal
HSH Associates, a financial publisher, created waves last week when it proposed a new loan-help program -- not for homeowners facing foreclosure, but for people who are paying on time and can't refinance into a lower interest rate because they're underwater.
"If a borrower did not cause a decline in his or her home's value, has been meeting his or her obligations without fail and is now, outrageously, being asked to pick up part of the tab for failed homeowners, he or she ought to get some subsidized benefit for doing the right thing," the firm wrote. "If it works, there would be a declining cost to the taxpayer over time, with the actual cost of 'assistance' possibly falling to zero."
Offering as an example a homeowner who owes $180,000 on a home now worth $150,000, HSH suggests a deal between the lender and the government. If the borrower sells before either rising home prices or mortgage payments have made up all of the $30,000 gap between the amount owed before the refinancing and the amount owed afterward, the government would pay the lender the difference. HSH calls this the "value gap refinance" plan:
To produce incentives to participate, and to help ensure fair return, the same market rate for the refinance mortgage should be applied to the value gap contract, so the investor would receive just as much as any fully refinanced loan amount would bring ($180,000 per our example). This interest cost could be borne by the borrower, just as the mortgage interest cost would be.
As time goes on, and home prices eventually recover, the amount of the value gap contract would diminish. ...
In exchange for the ability to refinance to a new mortgage with a lower face amount and a present-market interest rate, the borrower gives up rights to future appreciation -- but not forever. Any price appreciation would be committed to the value gap until such time as the value of the home once again exceeds the value of the original mortgage (per the example above, $180,000). The borrower would not be responsible for any shortfall, but only for interest payments on the amount of the shortfall.
More details, along with a tweaked version of the idea, are here. (The tweaked version, called the "shared obligation" plan, would have borrowers pay a "fee" in the form of an interest rate a half-percentage point above market rate to reduce the gap more quickly.)
Why have a program of this sort? HSH's argument: "A value-gap coverage program provides borrowers with a more compelling reason to remain in their homes -- a disincentive to walking away. It also alleviates the stressful short-sale process, leaving borrowers free to sell their homes at a value their markets will support. It can also allow for greater mobility ... the kind of mobility that may allow a homeowner to pick up stakes and pursue a better job in another locale. The change in a homeowner's cash flow can also provide meaningful budgetary relief, which in turn could support some additional consumer spending beyond simple necessities, providing a lift to the economy."
Fortune's senior editor-at-large, Allan Sloan, gave it a thumbs up. (The headline of his piece: "A reward for responsible homeowners.")
HSH posted a variety of comments from readers here, most of the "please yes" variety.
Underwater homeowners aren't the only unbailed-out folks out there, of course, and some of the others have had it.
"And what about folks like me who bought a home, lived within a tight budget, purchased what I could afford instead of pie in the sky dream homes, and then paid off the home in 7 years time. Where's my damn reward?" one Fortune reader wrote in the comments. "You know what my reward is so far??? Property taxes going UP. ... All I get is more hands in my pocket taking more money, to cover everyone else who made bad decisions in their life. I feel like Atlas supporting everyone."
What do you think of the HSH proposal, folks? Here, have a poll: