Stop the housing free fall

Posted: Friday, February 27, 2009

Pick up the paper or turn on the TV: Everyone has an idea for how to spend federal funds to turn around our collapsed housing market. Last week, President Obama took his turn, and the media and the markets have been picking his plan apart ever since.

I have a simpler idea about how we might stop the housing free fall, get back some of our lost consumer confidence and prevent bailout resentment of the "bail-ees" by the "bail-ers."

I call it the Second Trust Mulligan, and I can lay it out in three simple steps.

Step One: Using TARP funds, pay off all second mortgages held by institutions.

Step Two: Give every homeowner whose second mortgage was paid off a Form 1099, showing the entire payoff as income to the homeowner, who then pays taxes on that amount. If the homeowner is unable to pay what's due in the next tax year, IRS should agree to a 10-year repayment schedule.

Step Three - call this one the Timothy Geithner tax mulligan, to show that even ordinary folks deserve one free tax do-over: The IRS forgives all penalties and interest on the taxable value of the second trust waiver once the homeowner settles on a repayment plan.

If we take this track, I think we'd see some immediate positives.

Freed of their second trust, homeowners could refinance their first mortgage at a reasonable rate. The result would help shore up sagging home values, staunch the flow of foreclosures that serves absolutely no one - not the homeowners turned out on the street, not the banks who inherit a bottomless portfolio of empty houses, and not the neighbors who watch their property values sag, dragged down by the foreclosures - and restore the recipient's vested interest in the value of their home.

As for their neighbor - who didn't stretch for a subprime second trust, and therefore doesn't get forgiveness - Step Two of my plan prevents them from having resentment at missing out on a bailout. After all, Uncle Sam may not be zeroing out their second trust - but then again they're also not getting a 1099 on which they'll owe taxes.

Of course, even the simplest of ideas have devilish details, and that's true for the Second Trust Mulligan. Guidelines as to who qualifies for TARP Second Trust relief - such as original ARM status, the amount of the second mortgage, appraised value for qualifying properties and limits on forgiveness amounts - would all need to be set. A short questionnaire and few basic financial documents would make a good start. But chances are, the details could be worked out in something well under the 1,073 pages of the stimulus package.

I'm not a senator or a Cabinet secretary, but my plan maps out what I see as one possible path forward from the taxpayer trenches. I am looking for the simplest path to set things right - to allow taxpayers and homeowners a chance to rebuilt shattered equity and shattered confidence, and to do so in a way that doesn't create a resentful neighbor for every homeowner who gets help.

Like everybody else these days, I'll read tomorrow's news stories about housing debate. But I will wonder why we can't try to cure the problem that began with reckless lending by wiping out the reckless loans - and giving people a clean shot at starting over.

Somehow I think Secretary Geithner might understand the power of a second chance.

• Joan Gaven ( runs a financial strategy practice in Alexandria, Va.

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