Financial crisis what if- short sale loans

[yop]

What if the government started guaranteeing loans that would allow people to sell their houses for less than what they owe on their mortgages? This would allow people to get out from under most of their debt. They would have to find a new place to live, someplace much cheaper, but at least they wouldn't be trapped in a house they can't afford.

[Turbineguy]

1. The problem is on the other side

of the sale. Vultures would swoop in to buy houses discounted with tax dollars.

[yop]

2. Unavoidable

The vultures are going to get theirs, no matter what. The housing market is a massacre. Government-backed short sale loans might at least allow some borrowers to avoid financial death (bankruptcy). They'd emerge badly wounded, maybe even permanently crippled, but they could at least avoid financial death.

[yop]

3. Better than a Wall Street bailout

Short-sale loan guarantees by the government could help unfreeze the housing market. People would be able to get out of their homes into less expensive places, avoiding bankruptcy. Right now, millions of people are staring at bankruptcy because they are trapped in mortgages that they can't afford and can't get out of by selling their home because prices have fallen to less than their remaining mortgage balance. Replacing their mortgage with a smaller short-sale loan may allow them to avoid bankruptcy.

Investors would also be forced to realize their losses. They would get their principal investment back, but it would be sooner than they expected and with less interest paid.

But at least economic activity would return. The housing market would be made up of people selling off their expensive homes and buying cheaper places. Investors would get their principal back, returning some liquidity to the financial system.


Some benefits of short-sale loans-

Self-targeting. One aspect of the current crisis is that no one knows exactly how bad the problem is and where the bailout money should go. This addresses that. Borrowers in trouble realize they are in trouble and they will jump to take out short-sale loans. Other borrowers, who are hurting but not in trouble, will be more likely to try to muddle along in the hope that the value of their houses will come back up at some point in the future. The knowledge is out there- short-sale loans take advantage of that knowledge.

Expertise- Everyone involved is asked to do things that they already know how to do. The government has experience with guaranteeing loans. Banks would be responsible for writing the loans, something they know how to do. Home owners are better equipped to sell their home than a bank or investor- they would stage their houses and hold open houses like usual.

Mechanics- Home owners could get pre-approved for their short-sale loan. They would still want to sell their house for as much as possible, but at least everyone would know ahead of time that a sale was possible.

Of course, there are people who will still be in trouble even after de-leveraging from a mortgage to a short-sale loan. Hopefully this is a smaller number, though. Lots of people are having trouble dealing with payments on debts measured by the $100k. Hopefully, the number of people who are unable to deal with payments on debts measured by the $10k is much smaller.

[yop]

4. No comments?

Borrowers get to drastically reduce their monthly debt payments, by as much as 90% or even more maybe, depending on:
(A) the price they manage to get to sell their house vs. the price when they bought, and on
(B) the length and interest rate of their mortgage vs. their short-sale loan.
Yes, they end up with a debt on their balance sheet, but at least it's something they can cope with.

Investors are forced to realize lost profits, but they get their principal back. Since their number one problem right now is a lack of liquidity, they should be happy with the trade-off.

I just wish their was a way to tag the original writers of the mortgages with some of the responsibility for dealing with the mess.