Here’s my plan to save America’s “underwater” homeowners when we eventually plummet into a “bear” housing market & find that we have a plethora of those who owe more on their home than its alleged fair-market worth — it’s a 4-step process:

1) Have the president create an agency within HUD funded initially by the US Treasury & later partially or (hopefully) wholly funded by fees that, upon application by a homeowner, they will issue a check at a short sale to cover the difference between the appraised value & the outstanding mortgage balance, which check will be paid to the mortgagee (the bank/entity holding the mortgage) at closing.  A fee must be paid by the seller along with the appraisal fee.  The homeowner also agrees to sign a note for the shortfall check that will become a gov’t debt (with no time limits/expiration) on any future homes they buy.  This debt/lien is not to be included on credit reports & instead entered on a gov’t database to let lenders & closing attorneys know there is a future debt to be paid at some point if they have a closing with this person as a seller so that if they have any equity in any new homes, that new equity will pay down the debt.  It would be an interest-free loan & it can’t be bankrupted upon for at least 25 years. This would allows sellers to move on to a hopefully more profitable/valuable home & free up the market to jumpstart sales again, as well as provide more liquidity for banks & more opportunities for homebuyers, which in turn would bring home values up again & would possibly cure the negative equity problem entirely.

2) Have the President remove the due-on-sale clause for all FHA, VA, USDA, FNMA & even private or other conventional mortgage loans that are more than 5 years old & are current so that ANY buyer can buy them so long as they meet these simple guidelines — A) Show income that meets the FNMA income ratio test or show assets equal to 20% of the price of the home, which you must pay down the loan with; B) Show a credit rating of at least 640, with only a 24-month lookback/seasoning for foreclosures & bankruptcies, and 12-month for any other negatives on your credit (i.e., no 30-day late pays within 12 months), and no consideration for any medical bills in collection (they won’t count against you as long as they’re not judgments). Only a $500 leader fee or 0.5% of the sales price may be charged by the lender (whichever is less) to transfer the loan. The loan must be “above-water”, i.e., not owe more than the home is worth or the “underwater” provisions apply above.  This would also apply to short-sales as explained above.

3) Bankruptcy & credit overhaul — Bar current & future prospective employers & insurance companies & anyone else from checking a person’s or a business’ credit history if not in direct relation to a request for credit, and insurance “premium financing” will not be considered a debt for this purpose. A person with bad credit is usually not a bad person; they just either got caught up in a situation that went sideways without warning or made a bad decision that looked good initially, or are burdened by medical bills or a student loan (which can’t be discharged, but they can discharge the other debt so they can afford to pay back the student loan). Restrict credit histories to 5 years instead of 7, and put Chapter 7 BK back to 5 years for reporting (from the current 10 years) & set repeat filings of BK at no earlier than 10 years (currently 8 years). Remove the $150,000 loan threshold & make it so that no one can go back & look at a person’s credit history more than 5 years for any amount of loan. FHA, VA, FHMA & USDA loan guidelines must restrict seasoning of BK & foreclosures to 2 years (current law is 3 yrs on foreclosures & 2 years on BK, which makes no sense) unless it’s an equity sale with 20% down, which would be no seasoning needed.  Require all creditors to allow the customer to reaffirm a debt in BK at no worse than its current terms, and require all interest & payments to be frozen until the BK case is discharged so that debts aren’t piling up between the date of filing & the date of discharge.

4) Require land developers to provide at least 33% upfront equity in the form of cash or other marketable liquid assets as collateral, and require spec home builders to provide 20% of the building cost in cash upfront which includes the cost of the land. This will slow down the supply, increase demand & slow down future speculative booms, plus get rid of speculative builders who have little capital.

All of this makes perfect sense & will step on the toes of many wealthy bankers & real estate moguls, which is why it won’t ever happen, but they can’t say they don’t have a plan to fix it now.