Federal "Stay in Your Home" Insurance

Never thought I'd be happy about Congressional ineffectiveness, but in this case I'll make an exception.

Their inability to get anything done properly has given us a (few) breathless seconds to think about alternative steps to help soften our inevitably bumpy return to Earth from our debt-propelled cruise through the stratusphere.

I'll stay within the conceptual confines of "big government action" that apparently everyone is hungry for right now. How about ....

A new Federal "stay in your home" insurance program. Here's how it might work: Anyone with a mortgage on their primary residence can sign up for a Federal plan which allows them to opt for a renegotiation as an alternative to foreclosure if they have permanent trouble making payments. Eligibility criteria might look at the ratio of monthly mortgage payment to average monthly household income. The terms of the renegotiation should be standardized: either lower payments by extending the lifespan of the loan at the same rate ...

... OR lower payments by swapping with the Federal government a portion of the loan balance for a portion of the home's appreciation when the house is sold (or when it is paid off or refinanced, whichever comes first).

Tactically speaking, on the front-end, the insurance program would cut a one-time check to the lender for that portion of the loan, and the payments would be re-calculated based on the new balance and the original loan lifespan. On the tail end, the house sale would be subject to an additional "swap tax" which would be the greater of the amount originally "swapped" or a percentage of the capital gains large. The percentage would be set at re-negotiation based on the ratio of initial loan value to "swap" amount. For example:

If the borrower STILL fails to live up to their new, lowered, expectations, they might choose to swap again if there's enough home equity ... or the lender would proceed with foreclosure.

Clearly negative-ammortizations and HELOCs above 100% of equity would not be eligible. I'm sure realtors and mortgage bankers can think of other sensible clauses to ensure the homeowner doesn't simply let the house go to shambles. On the other side of the moral hazard coin, we'd have to figure out how to guard against abuse of the program or artificial manipulation of sale price.

The free marketeer in me would like to see these programs offered by the financial industry, not the Feds in the interests of overally efficiency for the macro economy, but I present this idea as a government plan to demonstrate that it could be run with minimal risk to taxpayers. A big buzz-concept in the coming years will be public/private cooperation. Applying that to my idea would be as simple as allowing the government turn around and sell these swaps in the open market in order to ensure market pricing.