Finally! Financial Innovation to Resolve Underwater Mortgages

By Shlomo  Maital

 underwater mortgage  

  What is the biggest problem facing America’s economy today? Well, of course, the economy’s utter inability to create meaningful jobs.  But underlying that problem is the ‘underwater mortgage’ problem.  Millions of American home-owners owe money borrowed to buy their homes, and their homes are worth less, often far less, than what they owe.  In principle, if you pay off your mortgage, you are paying much more than the asset you own.  If you fail to pay your mortgage, well, you’re a deadbeat and lose your home.  It is a bitter dilemma facing millions of Americans. 

      How widespread and severe is this problem?

   “CoreLogic recently estimated that about 22 percent of all of the homeowners in the US now owe more on their homes than what they are worth. In San Bernardino County alone, officials say that there are about 100,000 homeowners with underwater mortgages.”   

  One homeowner in every five (in fact, nearly one in four) owes more than their homes are worth. And there is little sign property values will rise soon.  In fact, as long as banks are seizing property and foreclosing after non-payment of mortgages, then selling properties, the supply pressure will keep property prices from rising.

   Where is the financial innovation that can cut through the problem and resolve it, so that homeowners can continue to live in their homes, and perhaps, feel secure enough to resume spending? 

  Here is a solution invented by  Mortgage Resolution Partners.  1. Local governments use funds raised on capital markets, and the law of ‘eminent domain’ (which permits them to buy assets they need to, for instance, build a road, at fair market prices), to buy mortgages now held by banks and other financial institutions.  2. The mortgages will then be restructured, to halve the monthly payment and allow homeowners to continue to pay the monthly payment, while living in their homes.  3. The newly restructured mortgages would then be sold to investors, hedge funds and pension funds, in order to pay back the money used to buy those mortgages. 

  Sounds complicated? It is, a bit.  And some are cynical about Mortgage Resolution Partners, a private investment firm that stands to make a tidy profit if the scheme goes through.  But so what?  If their innovation works, the benefit to America will be huge, far exceeding whatever profits MRP makes. Can local governments legally seize mortgages (force banks, etc., to accept fifty cents on the dollar for them)?  They can indeed.  The law of ‘eminent domain’ allows this.  It may be in the banks’ interest anyway. Right now they carry huge unrecognized losses on their books.  Why not recognize the losses, clean up the mess – and move on. 

    There has been a veritable desert of non-innovation in financial services, related to cleaning up the subprime mortgage mess. Finally some ideas are starting to emerge.  They deserve a try.  Any idea is better than no idea.  If they don’t work, try something else. But for heaven’s sake – try SOMETHING!