President Obama’s Homeowner Relief Plan is an important step towards resolving the current financial crisis. In particular, I support the key premises of the plan: 1) Preventing foreclosures will keep houses from being dumped onto the market, which drags down the value of neighboring properties and perpetuates the downward spiral in real estate prices; and 2) It is crucial to keep families in their homes in order to minimize the human toll of this serious economic downturn.
However, the President’s plan can be improved in a way that would accomplish both of those objectives while minimizing the cost to taxpayers and holding borrowers accountable for imprudent borrowing decisions. The government should place a lien on any property that is eligible for mortgage relief equal to the difference between the old and new mortgages. If the property is eventually sold at a profit, as is likely to happen with many of these properties when the real estate market eventually recovers, then taxpayers ought to recover some or all of the government funds that were used to keep homeowners in their homes during these difficult times.
As an example, the program might work like this in the 5th District:
A homeowner currently has a $200,000 mortgage on a home in Franklin Park that is now worth $180,000 and the payments are no longer affordable. The President’s plan would avert foreclosure by offering a new, more affordable $150,000 mortgage. However, this plan should also include a lien on that home for $50,000, which is the amount of taxpayer-funded relief offered to this homeowner.
If the property is eventually sold for $280,000, the government would receive $50,000 at the time of the sale. The property owner would still benefit from the appreciation in the value of the property; however, it is fair that the taxpayers be reimbursed for having averted foreclosure during this sharp downturn in the real estate market.
If a home does not appreciate in value before being sold, then the lien would not be exercised. Similarly, if a property appreciates only modestly, then only some percentage of the lien would be collected. The point of the program is simply to recover the cost of taxpayer assistance from the profits that would otherwise go to homeowners who have benefited from this government program.
President Obama’s plan is a crucial step towards stabilizing the housing market. This modification would reduce its total cost for taxpayers and impose a reasonable responsibility on the homeowners who take advantage of the mortgage relief.