Finally someone outlines the real problem in housing (besides myself)...of course the problem does not easily find a solution. I don't have a silver bullet, but I think there needs to be a combination of government, homeowner and banking industry help. A program where the government provides an incentive for banks to write down the loans, but not a complete bailout. Homeowners (myself included - down 40%) need to share in the pain. I bought a house and it has gone down in value, I could easily walk away - but I won't, the problem is others will. We need to give them an incentive to stay - this has to be a combination of payment relief, mortgage write-down and perhaps some government assistance with the write-down.
Lets say that someone has a $500,000 loan on a home now worth $250,000 - they can make the payments and are not struggling, but they have a huge loss that they don't see a way out of, they walk. If instead of owing $500,000 on this property they owed $325,000 - still under water - but not nearly as bad (and a good possibility of being above water within 5 years - versus 15) and the bank agreed to share the $175,000 loss with the government, say 70% the bank, 30% the government. I don't know, just thinking off the top of my head here - but the banks never should have lent this money to most of the people - the fact that they did led to many people paying inflated prices (which was the banks doing). Stupid should hurt and the banks NEED to feel some pain when they do stupid things. I really don't like the government involvement part, perhaps there is a better answer - or maybe an equity kicker for taxpayers if things recover quickly.
My point is not to present a comprehensive plan, Lord knows I've got more important things to tend too - like my family and my clients. However, smart people should be able to come together and address this problem - until they do.....the recovery will be slow and painful.
Scott Dauenhauer CFP, MSFP, AIF