The Milken Institute has been parading around their idea of debt relief for over-encumbered homeowners, in an attempt to keep them from walking away.

From the L.A. Times:,0,2308676.column

Say an owner’s mortgage is worth $400,000 but his house is valued at $300,000. The government would refinance the $400,000 loan with two new loans. Fannie Mae, the mortgage financier now under government control, would provide a first loan for the market value of the house, in this case $300,000. The Treasury would issue the second loan, in this case for $100,000.

The Treasury loan would be interest-only and would provide the vesting part of the program. For each year that the homeowner keeps up payments on both loans, one-fifth of the Treasury loan would be forgiven.

“This gives homeowners the incentive of returning to a positive net-equity position before their hair turns grey — maybe even in time to pay for their children’s college education,” Klowden and DeVol wrote in a summary.

They estimate that the cost to Treasury (and thus to taxpayers) of saving 1.5 million homes from foreclosure or abandonment with this plan would be between $75 billion and $100 billion. That assumes the government wouldn’t jeopardize the original lenders’ balance sheets by forcing them to share in the cost via haircuts on their loans.

DeVol concedes that the Milken proposal would be a handout to the usual suspects in the housing crash — mainly, California, Florida, Nevada and Arizona — because those are the places where the negative-equity problem is dire.

So Nebraska doesn’t need the program, but would have to help foot the bill.

This is another crazy proposal in a series of nutty ideas to prop up the housing market, and will probably fall by the wayside, like the rest. 

But here’s the best quote in the article:

Richard Green, director of the USC Lusk Center for Real Estate, also favors the debt-for-equity swap concept to permanently reduce mortgage balances for struggling homeowners. The need is chronic, he says, in places like Riverside County, “where prices aren’t coming back to where they were, maybe in our lifetimes.”

Yesterday chart showed that in 2005 the SD median-priced home was 9.7x the median income!

It’s not just Riverside County.  Let’s get used to the idea that we won’t be seeing the bubble-era prices for a very, very long time.

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