It’s more than just a question of staying in the house. It’s goes to the fact that people who are underwater on their mortgages-—BECAUSE of the subprime mess, which most of them had nothing to do with-—have RIGHT NOW lost every penny of their *usually considerable downpayments.*
They cannot sell without bringing substantial cash to the table. Even if they have assets, they are likely in the market, which is now down so that withdrawing money is very expensive.
These are the people who have the money to keep up consumer spending (which helps the economy), but who will draw back because they (1) already lost say a $100K downpayment on their home, and (2) are paying for a $500K house that is now only worth $300K.
These are the people who otherwise would be investing in small business, spending discretionary money, buying and selling homes as they move various places to pursue better jobs and so on-—they are COMPLETELY AT A STANDSTILL and will be until the gridlock in the housing market eases, which could be decades.
Those presently the focus of the “mortgage bailout” are very differently situated viz-a-vis their “contribution” to the economy. In short, they are not net contributers. They got a free home because of U.S. GOVERNMENT “affordable housing” programs, but they contributed nothing to that transaction and won’t be a net contributor after the government bails the bank out of it.
They will go back to living wherever they were living and doing whatever they were doing. Most will really not have lost much of anything out of their own economic pocket.
But because of that, the homeowners who did put 10% or 20% down on a recent home purchase-—or who did put down enough to “be wise” and avoid PMI-—have presently LOST REAL MONEY. Their ENTIRE DOWNPAYMENT will not be recouped unless and until that housing market starts functioning again-—decades from now.
The restructuring proposals for this type of situation that I’ve seen includes the homeowner giving the lender a stake in FUTURE EQUITY. So, even unlike the subprime borrower again, this prime borrower has to PAY for getting part of his mortgage balanced forgiven.
The lender revaluates the mortgage balance to, say, market value ($300K in our example), and the prime borrower gives the lender a lien on 50% of any future profit made upon selling the house.
This is still not a giveaway of the magnitude re subprime loans.
But it “unfreezes the assets” of people who will actually contribute to the economy in the future. AND they have to give up some future profits for easing their cash flow now!
Your proposal to have the lender reset a $500,000 mortgage for $300,000 with the lender taking a stake in the future profit of the house makes more sense than getting the government to do the same.
When government gets involved we know they will get political.
The government created the housing financial mess by promoting equity loans and subprime borrower loans.
I roughly calculated that the US housing stock has a value of about $12 trillion. If we can prevent more foreclosures from driving down the market value of all houses, then the US housing stock remains at $12 trillion.
As we all know in a market it only takes a small percent of sales to drive down the price on the entire inventory.
It is not only the US who is trying to prevent a meltdown in housing prices. If housing prices meltdown, it will have a ripple effect into other markets and then we have a global depression.