THE Housing Solution

Well the numbers are in and it looks like home foreclosures are up a whopping 15% in the first half of 2009, affecting more than 1.5 million households. This problem does not appear to be getting any better as unemployment is nearing 10% and could go even higher, if you believe like me that government forecasts are about as accurate as throwing darts in the dark.

So the most recent "shot in the dark" from the Obama administration appears to be this disaster: a rental option for those facing foreclosure. This will "help" people stay in their homes and will transfer their equity, if they have any, to the bank and allow them to rent from banks, who apparently are now to become landlords. This is flawed on so many levels I don't know where to begin. 

Perhaps they need to look no further than one of their own agencies, Sallie Mae, for a real solution to what's becoming the #1 problem with our economy and our country. Let's have a look.

When I was an 18-year old and about to start college, I knew it would be necessary to take out a loan to pay for some of the costs of attending a private university. What I didn't know at the time was that I was basically signing my life away, and that this debt would follow me wherever I went through life, the only way to get out of it being either death or permanent disability. And while I had always intended upon paying the money back and since have; had I understood those ramifications at the time I signed on, I may have thought differently about it.

Fast forward to today, the average college student graduates with over $22,000 in debt, and they haven't even entered the workforce yet!

So why are we letting homeowners (or those who took out mortgages) walk away from their obligations with not so much as a dent to their credit??? Unfortunately, the mentality that got us into this mess is the same mentality that will continue to kick this problem down the road in the name of populism. But I say: it's time to get tough!

Here's how to combat this problem in a sensible way without harming those who were responsible citizens (any more than they already have been) and at the same time holding all of the "bad actors" responsible.

• If you receive a foreclosure notice, you have 2 options: to either walk away (as is what is currently being done) or opt in to a new program which will be outlined below.Both options will have benefits AND consequences.

• If you choose option 1, the consequences are:immediate removal from the property in question.An automatic 400 point hit to your credit and you are BANNED for 10 years from buying another property unless you pay back the loss the bank incurs in full.It becomes a criminal offense to damage a house on the way out with automatic jail time.

• If you choose option 2, the new plan will be structured as follows:you are given a timetable by which you need to vacate the premises.The house is auctioned off immediately and whatever the market brings is final.The loss that is incurred is split 3 ways, 1/3 to the bank, 1/3 to borrower, and 1/3 to the government.

• However, the loss incurred by the borrower is given an immediate forbearance and it now becomes a Sallie Mae-type loan.

• For example:if a homebuyerpaid 500K for a home he can no longer afford, the home gets auctioned off immediately.Say it brings in 350K.The 150K loss gets split 3 ways and each party is responsible for 50K.

• But now the home-buyer does not have the "scarlet letter credit smear" on their report and can apply for a new mortgage at a time that they are ready to get back in the market.This means no more LIAR or NINJA loans.

• So now some time goes by and that original homebuyer is able to get back to work and maybe save up a little cash for a down-payment.He can come back into the market and buy the amount of a house he qualifies for LESS the amount of the money he owes on his first failed attempt.So if he qualifies for a 250K mortgage, he can only buy a home worth 200K.

• He pays a tax increase of 2% over the next 20 years to repay the government so that responsible citizens do not have to carry the load in full.

What does this accomplish? First, it allows the homebuyer an escape route AND still be responsible for their role in the mess and not be totally ruined. Secondly, it allows the banks to move the house quickly which will help housing prices bottom out more quickly which will bring in new buyers. It allows responsible homebuyers to upgrade if they choose, while at the same time forcing the less responsible to downgrade. The inevitable loss that a responsible homebuyer faces is off-set by the new lower price of his home, and you give him a tax credit for the loss which they can take over say 5 years. 

While this is just one proposal, I really hope the government adds an element of personal responsibility back into any program that they choose to try to combat the housing problem. But trying to artificially prop up home prices and rewarding those who acted badly all on the tax-payers dime is a travesty. 

After all, there are 22 year olds walking around with 25K in unforgivable debt and they haven't even been given the opportunity to act irresponsibly yet.