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As housing values continue to crash in many parts of the country, and as Wall Street investment banks wobble alongside individual homeowners under the weight of debt trapped in complicated mortgage-backed securities that are suddenly hard to value and even harder to unwind, many proposals have emerged to stabilize the U.S. housing market. The Center for American Progress has put forward a Great American Dream Neighborhood Stabilization, or GARDNS plan to turn around deteriorating communities, as well as a Saving America’s Family Equity, or SAFE program, to free up the pools of loans held in ways that impede the sensible restructuring and refinancing of mortgages made to responsible homeowners.
CAP’s SAFE and GARDNS approaches contain program elements that eliminate windfall profits for homeowners and borrowers who receive public assistance today, then later sell in a rising market. These elements reflect the principles that have been tested and developed over decades in a number of shared equity homeownership programs, some of which will be detailed in this paper.
A quick review of the many congressional proposals addressing foreclosures shows that there seems to be growing support in Congress for individual homeowners who either find themselves trapped in untenable adjustable interest rate mortgages or owning homes that are worth less than what they own on their mortgages.
This emerging bipartisan consensus agrees that strong federal intervention is needed to stabilize communities and mortgage markets but opposes any bailout of housing speculators, and is keen to ensure that any federal support of responsible homeowners does not result in windfall profits for these individuals if housing markets soar after government efforts to stabilize the situation.
Former Reagan administration Council of Economic Advisers Chair Martin Feldstein, for example, argues that the federal government should pay down individual mortgage loans by 20 percent, with a type of “soft second” mortgage using Treasury funds to relieve payment burdens and allow values to stabilize and rise. Economists Mark Zandi and Alan Blinder have also commented favorably on the general approach. And CAP, of course, has offered its two proposals. Virtually all proposals boast some common key features:
- The debt burden on overextended homeowners would be reduced to manageable levels through concerted government action
- Homeowners helped through mortgage restructuring and refinancing, or by access to a home reclaimed from foreclosure and resold, should not get a personal windfall
- The federal government would share directly or indirectly in any future appreciation of the value of homes in which the underlying mortgage was restructured and refinanced, or foreclosed upon and resold, using federal money
This paper will first outline some of the programs that embody shared equity principles, and then outline a specific application of the shared equity approach to the current mortgage crisis that we believe can address the needs of large numbers of overleveraged homeowners while avoiding windfalls and unwarranted bailouts. (A good resource for information on shared equity principles and programs is found on the National Housing Conference website’s shared equity page.)
Read the full report (pdf)