Bank of America today announced a new plan by which individuals would turn over their deeds to the bank but then be allowed to stay in the homes as renters. This idea has some merit and addresses some of the problems that banks face. For one thing, banks would not have more homes sitting empty, being subject to vandalism and damage from natural events without someone being home to reduce the damage done.
The trouble is, however, that people who cannot afford to pay their payments may not be able to pay the rent. This might just result in a default in rent and an eventual eviction anyway. This also creates a renter’s mentality, in which they may not take care of the home.
For those who are unable to pay the payments because of a job loss, there is really little that can be done except wait for the economy to recover. There are others, however, who could make the payments but choose not to because the house is worth less than they borrowed. The issue is that there is a perception that one could just walk away and not need to pay back the loan – that one would almost be a sucker to pay the loan in full. While banks can chase borrowers for the difference if the house is foreclosed upon, many choose not to do so. This leads to more people walking away, causing home prices to decline, and the cycle continues.
There are really three issues that a plan to solve the issue must address:
1) The plan must remove the incentive to walk away.
2) The plan must lower the payments to a level that the borrowers could afford and give them freedom to refinance and/or move to a different house, and
3) The plan must provide a way for the loans to be repaid in full.
Here is my plan, which I believe addresses all three issues:
Make a deal with the borrower in which their payment would be lowered to an amount they could afford (say 25% of their take-home pay). In exchange, the borrower would sign an agreement with the bank that the bank would receive all appreciation on the property until the value of the house was high enough to repay the original loan in full. At that point, the borrower could refinance the house into a standard loan, repaying the original lender.
If the homeowner chose to move, they could do so, but the lender would receive the appreciation on the original house when it sold, plus they would receive all appreciation on the new house until, once again, the loan was repaid.
The advantages to the borrower would be the following:
1) They would be free to move or sell their house if desired. In the case of a job loss, they would be able to more where there were jobs and better pay.
2) Their payments would be reduced to a reasonable amount.
3) They would be using the leverage of their home to repay their loan faster than they could with a standard loan.
The advantages for the bank would be as follows:
1) They would have people remaining in the homes, taking care of them.
2) They would have a much better chance of the loans being repaid.
3) They would not end up with foreclosed homes, with the accompanying cost for repairs, taxes, and sale.
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Disclaimer: This blog is not meant to give financial planning or tax advice. It gives general information on investment strategy, picking stocks, and generally managing money to build wealth. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. Tax advice should be sought from a CPA. All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.