Obama’s mortgage modification plan has, for all intents and purposes, failed. It’s too complex, there’s too much resistance from banks, and there are not enough resources in place to rapidly restructure existing terms.
So, what’s the answer? Just let millions more homeowners default?
No, says professor Luigi Zingales, of the University of Chicago’s Booth School of Business. (See the video above from TechTicker).
Zingales’ answer is something similar to the debt restructuring that bankrupt corporations go through: debt-for-equity swaps in which not only monthly payments but actual principal owed is reduced.
In Zingales’ plan, homeowners who are more than 20 per cent underwater on their mortgages would have the right to reset the value of the loan to the house’s current value — in exchange for giving half of the future upside to the bank.
From the bank’s perspective, this plan would have the same drawback as today’s mortgage modifications: It would force an immediate writeoff. But if homeowners were given the option, the banks wouldn’t have any choice.
This plan would have the added benefit of banks having to come clean about the health of their balance sheets and the value of their loans, which we’ll be hard-pressed to get any other way.
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