The problem with the proposed solutions to the home financing crisis is there is no apparent downside for affected homeowners. Many people who may not necessarily need help will understandably try to take advantage.

One approach that would allow more homeowners to stay in their homes and yet minimize participation by those simply trying to take advantage of their lenders would be to force a homeowner to surrender part of any gains from selling the house in the future. If a lender is forced to accept a lowering of the mortgage principle, any future sale of the house at a higher value would create an appreciation gain that would be shared with the lender.

Since home appreciation is normally not taxed, the lender’s part of the gain would also be tax free. Some private REITs (real-estate investment trusts) could choose to buy up these mortgages to take advantage of potential profits, freeing lenders from toxic assets and allowing them to make other loans.

Bill Hirt