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NOT MORTGAGING THEIR FUTURE NOW

One economist's idea is to let owners become renters instead.

Now that the government has "saved" Wall Street - at least for the moment - hasn't the time finally come to save Main Street too?

Recently a proposal came across my desk that I believe is so smart, and so sensible, that I hope our nation's policymakers will give it a serious look. It comes from Daniel Alpert, a founding partner of Westwood Capital, a small investment bank. I have quoted Alpert frequently in recent columns, because he has been both thoughtful and prescient on the subject of the financial crisis.

Here's his idea: Pass a law that encourages homeowners with impaired mortgages to forfeit the deed to their lenders but allows them to stay in the homes for five years, paying prevailing market rent. Under the law Alpert envisions, the lender would be forced to accept the deed, and the rent. After five years, the homeowner-turned-renter would have the right to buy the home back, at fair market value, from the lender.

There are so many things I like about this idea that I hardly know where to begin. Let's start with the fact that it doesn't require a large infusion of taxpayers' money. Indeed, it doesn't require any government money at all. It also doesn't let either homeowners or lenders off the hook, as many other plans would. The homeowner loses the deed to his home, which will be painful. The lending institution, in accepting prevailing market rent, will get maybe 60 or 70 percent of what it would have gotten from a healthy mortgage-payer. (Rents are considerably lower than mortgage payments right now.) That will be painful too. Moral hazard will not be an issue.

As Alpert told me the other day, his proposal "admits the truth: The homeowner doesn't have equity, and the lender has taken a loss. They should exchange interest, but not in a way that throws the homeowner out in the street."

Which is the other key part of his plan. It has the best chance of preventing, as he puts it, "the massive disruption of the economy and the social dislocation" that will come from large numbers of foreclosures. And it is the continuing foreclosures that are likely to cause housing prices to fall so hard that they will drop below the real value of the shelter.

That, of course, is exactly what happened during the bubble, albeit in reverse - prices wildly overshot the true value of the home - and it has to be prevented on the way down. Otherwise we face further economic calamity.

Why did Alpert choose five years? Two reasons. First, he feels confident that housing prices will have stabilized by then. "We continue to have a growing population," he said. "And there is zero chance there will be a material increase in housing stock over the next five years that will exceed demand. Those two factors alone will cause housing to stabilize."

Second, he says five years will give the renters enough time to get their financial affairs in order - to pay down their various debts and save enough to make the 10 percent down payment an FHA loan requires. (Many of the homeowners affected by this plan would be eligible for FHA loans, Alpert believes.)

If they don't have enough for a down payment, they would have to leave, of course, but it would be far less disruptive to the economy than it would be right now, in the middle of the crisis.

Does the plan have stumbling blocks? Sure it does. One obvious one is that ideologues will view its being mandatory as an improper "taking" of homeowners' property rights and a violation of the mortgage contract. But, as Alpert puts it, "the homes involved are economically without value to the existing homeowners." He adds, "What the plan buys is time to heal for both sides in a fairly equitable and controlled manner."

Alpert calls his plan "The Freedom Recovery Plan." On my blog (www.nytimes.com/executivesuite), I have linked to Alpert's detailed description of how it would work, which runs eight pages. I have also posted a series of short "comments" that he sent me recently, which outline the severity of the problem. I encourage you to read both documents, and weigh in on the plan's merits.

That goes for you, too, government policymakers. I acknowledge that this may not be the perfect solution. It may have some fatal flaw that neither Alpert nor I can see. But if you don't like this idea, it is incumbent upon you to come up with something better.

Actually, it's long overdue.

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