My Home About Me

...then this idea from Arnold Kling on how to help over-their-head subprime borrowers is a pretty decent idea. He calls it "Bailie Mae" --

When a borrower swaps [debt for equity] with Bailie Mae, the borrower's monthly payment of principal and interest immediately falls by 20 percent. Instead, Bailie Mae provides the other 20 percent of the monthly payment. The borrower still has to pay the full cost of other components of the mortgage payment, such as taxes and insurance.

As long as the borrower makes the new monthly payment, he stays in the home. When the home is sold, 20 percent of the gross proceeds go to Bailie Mae. At that time, Bailie Mae will be responsible for repaying 20 percent of the outstanding balance on the mortgage loan.

For example, suppose that the outstanding balance at the time of the swap is $100,000, and the borrower's monthly principal and interest is $800. With the swap, the borrower's monthly principal and interest payment would drop to $640, and Bailie Mae would pay $160 per month.

Several years later, the borrower gets a job in a new city and sells his home. By this time, the outstanding loan balance is, say, $90,000. Bailie Mae is responsible for 20 percent of that, or $18,000, with the borrower responsible for the remaining $72,000. If the home sells for $110,000, then 20 percent of that goes to Bailie Mae, which means $22,000. Another $72,000 is used by the borrower to pay off the loan, leaving $16,000 to go to the borrower.

Suppose that the house is sold for only $80,000. In that case, Bailie Mae gets only $16,000 even though it still has to pay $18,000. The borrower gets nothing, and $62,000 goes toward paying off the loan. The cost of the remaining $10,000 shortfall in paying back the loan is borne by the responsible lending party--perhaps a bank, perhaps a mortgage insurer, perhaps another financial market participant involved in trading credit derivatives. If there are large, widespread losses, they will be borne mostly by the original investors, and only somewhat by Bailie Mae.

Many economists are pessimistic about the outlook for home prices. If they are correct, then the swap plan will spread the losses around. Most of the losses will be borne by investors on the lending side. Some of it will be borne by homeowners. And some of it will be borne by Bailie Mae.

Only one thought. Why does this have to be a government program? Could a consortium of investors come together into a new firm that does the same thing?

Thanks to my DC-insider pal "Mick Danger," who is concerned that government is going to go way beyond something like this.

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