If Uncle Sam Takes Mortgages and Becomes Landlord

What if the government adopted a new strategy on how to keep homes occupied by delinquent and troubled owners by letting them stay in the house as a renter?  This may sound crazy or like the ultimate bailout, but that is apparently at least a possible scenario according to Reuters.

The idea would be that homeowners that are delinquent could surrender ownership of their homes but could continue to live as a renter for several years.  Another notion would be to have the government make mortgage payments for borrowers who cannot keep up with their home loans  or to get a stipend for house payments along with unemployment benefits.  There is another option that Uncle Sam could consider.

This notion will make the free-marketers or even the responsible borrowers cringe.  But outside of that, there is something that was never really brought up that was left off the table.  If there are still so many loans in trouble and so many problem mortgages, why doesn’t the government create a new mega-mortgage pool where it assumes all these crazy and delinquent mortgages and pay them off over a gradual period?  Under this plan, the government could do a massive refinancing for all the pay option ARMs, interest only loans, and other exploding ARM and problem mortgage products out there.  This would be at negotiated or reduced rate to face value to keep the banks from having to take foreclosure hits on each mortgage.  The government could then do a low-rate subsidized mortgage on a one-time basis and still allow the current owner to stay in the house.

Imagine if the government could go in and buy down all these problem mortgages for a theoretical 75-cents on the dollar.  Uncle Sam could turn around and offer a “stay in your home” one-time offer of a 30-year mortgage with a very low rate.  Or in some cases it could take a P.O. or principal-only loan approach for the first few years of a loan.

At the end of the day, what the underlying trend is still telling you is that there are many more foreclosures coming and more borrowers on the verge of collapse.  The government can’t afford to bail everyone out, but if it can slow the bloodletting and eliminate at least many more of the crazy loans for troubled borrowers then it has an outside chance of accomplishing the nearly-impossible.

There is of course the flip-side to this.  If you are a solid borrower who has stayed responsible throughout the entire downturn and meltdown and stayed within your means, this is just another thorn in your side.  But in a sense, you would get a reward for such behavior.  You will probably get to pay more to help others with another surtax.

Jon C. Ogg
July 15, 2009