What if we eliminated all the mortgages?Patrick W. Begos and Joseph L.A. Tesorierehousing market, government, banks, investors, foreclosures
Disclaimer: The views expressed and written in this article
are those of the author alone and do not necessarily represent the
views of The Mortgage Press, the National Association of Mortgage
Brokers and NAMB's state affiliates.
It's time we start looking at mortgages in a new way. We need to
stop thinking we can change the current mortgage mess by providing
ever-increasing incentives to lenders to do the right thing and
help fix the crisis. Up until now, weve been approaching the
problem by asking lenders how much we need to pay them to allow the
government to begin fixing the housing crisis. With an approach
like that, there can be no widespread fix to the housing market
unless, and until, the government is able to convince (i.e., pay)
enough lenders and investors to give up their control over the
mortgages.
This is backwards. We think it's time to put the control of
these mortgages into the hands of homeowners. Nothing will change
until borrowers are able to replace their upside-down loans with
loans that actually give them equity in those homes. And we think
that the owners of these existing toxic mortgages should have to
prove what they were actually worth before getting a dime from the
government.
All of this is possible. All we need to do is eliminate the
existing mortgages. It may sound crazy, but its not. In fact, the
concept is a simple one. Heres how it would work: The government
would pass a law to nationalize every mortgage on every primary
residence, and then satisfy every one of them. The country would
immediately be filled with unencumbered houses. Every foreclosure
would stop.
The government clearly has the legal right to do this, if it so
desires. The process is called "eminent domain," and it allows the
government to take private property for a public purpose. All types
of private property are taken for all sorts of purposes, including
the taking of private airspace to approach a military airport, the
taking of rooftop space for antennae, or the taking of interest
earned in lawyer trust accounts to fund legal aid programs. The
purpose of saving the nation's housing market certainly is
sufficiently "public" to justify the use of eminent domain.
Under the law of eminent domain, the government must provide
"just compensation" to the owner of the propertyin this case, the
owners of the mortgages. This plan, therefore, requires a mechanism
for banks and investors to get reimbursement for the loans that the
government would take. To claim its "just compensation," a bank or
investor would have to prove what a particular mortgage loan is
worth. If an investor holds a bad mortgage, such as one where the
borrower has no income or the loan value far exceeds the property
value, that investor would not get all of his money back. The
result would be a healthier banking system, because banks that made
good loans would be "rewarded" and investors who knowingly
purchased bad loans would be "punished."
Clearly, the government will have to pay a substantial amount of
money to lenders. Where will that money come from? Much of it will
come from the homeowners themselves, because the debt that the
government forgives would be taxable income to the homeowner.
Having the government eliminate your $500,000 mortgage is no
different than having it hand you a check for $500,000. So, each
homeowner will owe the government a substantial tax paymentlets
say, 35 percent of the amount of the loan forgiven.
But where will the homeowners get the money to pay that tax?
After all, if Harry Homeowner had a $500,000 mortgage, he will owe
$175,000 in taxes next April. Harry, however, will have a house
that is completely unencumbered. Even if he could not convince a
bank to lend him $500,000 against his house today, he should have a
much easier time borrowing the $175,000 he needs to pay taxes.
Indeed, we expect that banks would be competing to provide a loan
to Harry. This is because the banks will have just lost their
entire portfolio of mortgage loans (which are assets on banks'
books) and will want to replenish that side of their balance
sheets.
This plan would immediately eliminate foreclosures. It would
provide homeowners with an immediate infusion of disposable income,
because they no longer need to make the payments on their existing
mortgages. It would also eliminate the drag on house sales caused
by the lack of equity. Homeowners who want to sell would be able to
do so without taking a loss or begging the bank to approve a short
sale. The housing market would immediately begin to pick up
momentum.
That's the concept. There is at least one fly in the ointment
that will need to be dealt with: When the government takes the
mortgages owned by the banks, those assets will no longer show up
on the banks' balance sheets, making them insolvent. There are ways
to address that, such as passing interim bank regulations and
enabling emergency loans to prop up the banks until they can
replenish their balance sheets with new loans. Another mechanism
would be for the government to issue coupons to homeowners that are
worth 65 percent of the amount of their mortgage. When a homeowner
gives this coupon to her bank (plus the additional 35 percent in
cash) to refinance her existing mortgage, the bank receives assets
with the same nominal value as the original mortgage. Of course,
the value of the coupon may ultimately be less if the bank cannot
prove that the original mortgage was worth the face amount of the
loan.
Would this plan be more expensive than the current plans under
consideration? Maybe, but keep in mind that nobody can yet say what
the current plans would end up costing us. Even if the cost of this
plan is double or triple the cost of the plans currently on the
table, the lions share of the benefits will go directly to
homeowners. How many citizens are going to complain about that form
of government spending? Think of it as "a chicken in every pot" for
the 21st century.
Patrick W. Begos is a founding partner of the Westport,
Conn.-based law firm of Begos
Horgan & Brown LLP. He has represented both borrowers and
lenders in mortgage foreclosures for the past 20 years. Patrick may
be reached at (203) 226-9990 or e-mail
[email protected]. Joseph
L.A. Tesoriere is a founder and the president of Westport,
Conn.-based Omni Solo, a
consulting firm that specializes in restructuring consumer and
business debt. Joseph may be reached through his company's Web site
at www.omnisolo.com.
