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A Libertarian Solution to the Foreclosure Crisis

The mortgage crisis can be partially solved by federal or state government without deviating from Libertarian principles.

Let’s assume the current pattern is followed. The homeowner, who purchased the home for $250,000, falls behind on a mortgage and finally stops paying after he or she runs out of assets and credit. The bank knows that the homeowner is unable to pay, given that the outstanding principle is substantially higher than the actual value of the mortgaged property. In this case, let’s assume the home’s current market value is $150,000. The bank moves in and sells the property for $100,000 through foreclosure action. For whatever reason, banks have proven to be more than willing to sell properties for prices below market value to another buyer or investor than to the homeowner or any of the homeowner’s relatives for the fair-market price of the home.

Banks across the country (for reasons everyone understands) want to squeeze all the blood they can out of the often-victimized defaulting homeowner. But once this is done and proven to the bank’s satisfaction, the homeowner should not be disabled from competing to stay in the property. If the homeowner is able to pay a mortgage based on the home’s current market value, he or she should be able to obtain a loan modification and purchase the property as a matter of law and public policy. This would minimize the cost to the bank and to taxpayers.

Let’s look at the example of a homeowner who has an unpaid principle of $300,000 on a property with a current market value of $150,000. Once the homeowner has shown an inability to pay, he or she should be given a first option of a loan modification agreement with the following terms:

A principal amount equal to no more than the present value of the mortgaged property ($150,000), plus any additional amount the bank would require the homeowner to pay if the homeowner sought to do a “short sale.”
Over the past few years, banks have required homeowners to submit financial information in support of a short sale application. The bank will use that information as a base for its demand of a sum of money from the homeowner as a condition of approving the short sale request. Also, banks generally won’t permit a short sale to be made to the homeowner or any relatives of the homeowner.
An interest rate at the current market level, as if the homeowner were a third party purchasing the house with a bank loan secured by the property.

To make this solution available to millions of distressed homeowners, Carl Person would add a requirement for the banks to consider the following financial contributions to the homeowner’s application for a loan modification agreement or other financial relief designed to keep the homeowner in their property:

A promise to pay or guaranty a monthly amount to the bank from credit-worthy friends, relatives, associates, employer, church or other party.

Promise by the homeowner’s local government to reduce real estate taxes by a specified amount each month, for a period of three years or longer, with such amounts being added to the mortgage with a lower priority than the bank’s mortgage.

The purpose of these two items is to give the financially troubled homeowner three years or more to address his or her financial difficulty, or perhaps in which to sell the property for a higher amount that could be obtained today through a distress sale. The homeowner may also use that time to possibly find others to share occupancy and/or costs.

Applying these Libertarian principles to the crisis would benefit taxpayers, banks and homeowners, and would solve a significant portion of the nation’s residential mortgage foreclosure problem. Existing incumbents - both federal and state - should be voted out of office for their incompetence and failure to enact an obvious program for relief, and for their corrupt practice of taking orders from the banking interests who fund their election campaigns.