Seven Sons

     Okay,  I think it is pretty safe to say that I have never agreed with anything that any of the aforementioned nitwit CNBC analysts have ever said.  While we are a pack of tempermental bastards, they are a collection of immature, short-sighted, opportunistic, conservative, well, nitwits pretty well names them perfectly.

     However, I guess that like monkeys with typewriters and infinite time, one of them gets it right once in a blue moon.  Today, CNBC’s Rick Santelli had  a brilliant take

This subject has been boiling in my brain for a few weeks.  My wife and I are lucky to have a very nice upper income.  Hoever, we choose to live beneath our means.  If you go to one of those sites that helps you calculate how much house you can afford, we can afford about 3 times the value of our current home.  Why should those who live within their means bail out those who don’t?  Further, what about the renters?  Why should they bail out (through taxpaying) those who shouldn’t be homeowners but somehow are? Now, some of those homeowners who are in trouble got in trouble through no fault of their own.  But I don’t see a realistic way of sorting out the wheat from the chaff.  And, unlike Mr. Santelli, I do see the danger to the 92% of homeowners who pay their mortgages on time that the collapsing housing market presents.    

     All that said, the bottom line is the Obama  administration’s first stab at this is completely wrong.  Santelli (and sadly, Rush) get this one right.  It is the government rewarding bad behavior.  Here is how to solve this.  A bailout now with a built in pay back later.  The current plan would reduce the mortgage payments of homeowners in trouble to no more than 31% of their monthly income. My plan is as follows.  Suppose this means that  the mortgage has to be reduced from $200,000 to $150,000.  The federal government would take a lien on the  house for $50,000.  Eventually, the housing markets across the country will recover and begin appreciating again.  When the property was eventually sold, the government would receive 1/2 of any appreciation from the $150,000 figure.  In about 5 or 6 years, I would also start charging a 1% annual interest rate to preserve some of the value of the government’s lien.  Each time the house was sold, 1/2 the equity of any amount of the previous lien would go to the government until the lien was fully paid off.

     In my example, the lien would be $50,000.  The family lives there another 5 years and then sells the house for $170,000.  Normally, they would realize a profit of $20,000 over the  the $150,000 value of the home at its government-backed refinancing.  Instead, the homeowner would keep $10,000 and $10,000 would go to the government.  The new property owner would have a house worth $170,000 that had an additional $40,000 lien on it.  When that homeowner eventually sold, half of that homeowner’s profit would go towards the lien.  The lien could be paid off early with no penalty.

     I am aware that this is rather simplistic solution and that I don’t know enough of the mechanics of the  real estate market to get all the details right.  You have to figure out how to get the second and third buyer to be will to by a house at the value of the home and accept the continued lien.  Still, I think you could create a reasonable fair system along this basis that wouldn’t leave the responsible folks feeling like they’ve been suckers.