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Old mortgage practice has merit
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TEXT OF COMMENTARY
KAI RYSSDAL: With today’s new mortgage plan from the FDIC, there is some hope for homeowners staring down the barrel of foreclosure in this economy. As John Dimsdale was telling us, the $40 billion it’s gonna cost will come out of the original pool of bailout money.
But commentator and economist Andrew Caplin says helping troubled homeowners doesn’t necessarily need oceans of government cash — he says it can be done using a type of mortgage developed 40 years ago, but never widely used.
ANDREW CAPLIN: In most parts of the country, house prices are plummeting. Families are defaulting on their mortgages and being kicked out of their homes. That’s bad news for them, but also for us, because bonds issued on the backs of those mortgages are being bought by the government as part of the Wall Street bailout. The more borrowers who default, the less those bonds — our bonds — are worth. Future taxpayers — our children — are being condemned to a subprime future.
But there is a way out of this mess. Meet SAM. SAM is a shared appreciation mortgage, where the lender and the borrower essentially become stakeholders in the house, and where both profit when a home increases in value. SAM can reduce defaults and loan losses and give us taxpayers a fighting chance of coming out on top.
Here’s how: Imagine a family that took out a $200,000 mortgage but can only afford payments on a loan only three-quarters that size. The hole they’re in gets deeper when the value of the house falls. Rather than repossess the house the lender can opt to refinance the mortgage with a $150,000 SAM. That way, the lender gets something in exchange for the write-down: a significant share of any future appreciation in the house. So, if five years later, the house is sold into a recovered market for $200,000, the lender would get an appropriate share of that profit.
If we allowed SAM in this country, taxpayers would get a share of the appreciation in any houses that got written down. This would reduce the odds of the homeowner defaulting and increase the value of those bonds that you and I now own.
Tragically, as useful as SAMs could be to our economy, we can’t use them. The IRS imposed a block on SAMs nearly 40 years ago. But that block could be lifted with the stroke of the Treasury secretary’s pen. Henry Paulson should pick that pen up and save our children from a subprime future.
RYSSDAL: Andrew Caplin is a professor of economics at New York University.
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