BofA...feeling benevolent? And My solution to the housing crisis!

Late Tuesday, Bank of America, the largest mortgage servicer in the country, said it is giving some of its most troubled mortgage borrowers relief from the threat of foreclosure... it will forgive up to 30 percent of some customers' total mortgage balance. The homeowners must have missed at least two months of mortgage payments and owe at least 20 percent more than their home is currently worth.

The plan is part of an agreement the bank reached with state attorneys general to settle charges over high-risk loans made by Countrywide Financial Corp. The loans were made before Bank of America acquired the mortgage lender and Bank of America has since stopped making those loans.

The Treasury Department, is developing similar plans for principal reductions at other mortgage servicers, according to industry officials speaking on condition of anonymity because they were not authorized to discuss the conversations. They said an announcement could come in the next few months.

Although this is a baby step in the proper direction to stemming the continuing decline in home values, this, in my humble opinion. is not the answer...but, here comes MY solution to the entire housing crisis...if you read it and concur; forward it on to your congressmen, the press and anyone else you can think of.

Framing the issue: We already know that the banks are willing to do 2 things with troubled loans; 1) foreclose, and 2) short sell. The biggest trouble with both is that after a foreclosure sale or a short sale there is a new, LOW sale recorded in public records...which only serves to continue to drag down the value of all of the surrounding properties (ask any appraiser). Which causes MORE homeowners to be "upside-down", which then causes more short sales and foreclosures...a vicious cycle.

Now, obviously, the banks are willing to take (or have to take) the losses from the foreclosures and short sales, but my solution eliminates the losses AND the low public record sales price...maintaining surrounding home values, eliminating vacant and vandalized homes and minimizing bank losses.

My Solution: Instead, the banks should use the same valuation/loss analytics they use to determine whether or not to accept a short sale and offer a solution to the current homeowner based upon that figure. For example...if a current owner owes $400,000 on a home that the bank would sell at a short sale or foreclosure for $250,000, the bank should re-amortize the current owners loan at the current interest rate at a principal balance of the same $250,000...

BUT, the big difference is the bank WILL NOT be forgiving or losing $150,000 because this is what they will do: the $150,000 will be a 2nd position lien on the home with NO payments due. The note for the $150,000 will include language that "writes down" the balance over 15 years. If the owners stay in the home 15 years and stay current on their loan every month, the note will be extinguished...if they decide to sell prior to 15 years, the remaining balance of the note will have to be paid off at that time. Also, NO adverse credit reporting to the credit bureaus would be allowed until and unless the owner fell into default.

The above solution addresses almost all of the problems incumbent in the current housing crisis: 

1. No more low sales in public records continuing to pull down the housing market
2. Neighborhood stability
3. No more huge losses for the banks
4. No more credit-crippled 'lost generation'

This solution would give the bank, the homeowner and the housing market in general time to 'catch-up' with home values without exaserbating the problem by continuing to sell homes at lower and lower prices. The market would stabilize, begin to appreciate, and the differential between home value and note balance will decline. The banks may have to write off the loss over 15 years rather than all at once...but maybe not. If an owner were to sell before value and note balance evened out, there could be language in the agreement that converts the remaining balance of the 2nd lien note to an unsecured note payable over the remaining term at a pre-determined interest rate. But if the owners sell and the home has appreciated in value enough to pay the 2nd lien balance...NO loss for the bank..it gets paid back!

I have given this much thought and the above is just an overview of the process. I would love to propose the details and options to anyone who could help...lets start a grassroots effort to get my soultion out there!

Thanks for reading...and email me your opinion if you have time,

Steve