Thursday, May 10, 2012

The Mortgage Crisis and Current Housing Market: Practical and Complete Recommended Solution

[Authors: Charles F. Beauchamp, Assistant Professor, Middle Tennessee State University; Michael Ehrlich, Assistant Professor of Finance, New Jersey Institute of Technology; Robert Atra CFA, Professor of Finance, Chair - Department of Finance, Lewis University; Lee Hayes CFA, Founder - Genesee Investments; Steve Patrick, Founder - BID Consulting Services; Rawley Thomas, Former VP - Practitioner Services of the Financial Management Association, President & Co-Founder - LifeCycle Returns. 

With Contributions by: Linda Halton, President & Founder - Adaptive Finance; Gary Lundeen, Short Sale Attorney; Greg Stewart, Home Property Appraiser] 

Introducing a little discussed concept to mortgage markets termed Price Appreciation Rights; this proposal presents a practical private sector, non-partisan solution to the ongoing housing and mortgage crisis plaguing the United States economy. Under this plan, financially distressed home owners present a deed-in-lieu of foreclosure as an alternative to default and agree to rent the property from the loan servicer at an affordable rate. This arrangement prevents vacated property decay and maintains the value of the rented property and that of its neighboring properties. In addition to the rental payment, qualifying renters may also make equity payments into the property with the goal of reaching a 20% equity stake. Upon financial recovery of the renter and after reaching the 20% equity stake, the renter can then repurchase the home for the value of the property at that time. In return for assuming 100% of the risk in the rent-repurchase agreement, the loan servicer is entitled to 75% of the increase in the home’s value realized during the rental phase, i.e. Price Appreciation Rights. The renter is entitled to 25% of the Price Appreciation Rights. This solution can be administered in similar forms to first time home buyers and other subprime market participants. If properly implemented, the proposed solution should return proper clearing mechanisms to both the housing and mortgage markets. As a result of returning to functional mortgage and housing markets, housing demand and prices should begin to increase leading to economic recovery including higher levels of employment.