One Possible Housing Solution...

...or at least an assist.

Well, Treasury Secretary Geitner just announced the "plan" for dealing with troubled assets and, well, didn't really say much! The stock market reacted by being down 3.5%. Strange move by Treasury and the administration, given they knew people wanted something of magnitude. I guess we'll wait around for details.

I am not here just to whine. I really do want to offer solutions when I see them. I don't have solutions for much, let alone the kind of tough questions we are discussing. However, an entrepreneurial and very respectable friend of mine may have a solution for one issue!

This friend is in the business, with a trusted partner, of purchasing foreclosed houses that need renovating, renovating them and then reselling them. Sound familiar? I'm not talking about the housing flipping shows of 12 months ago. The catch is that he is buying them at auction (often below tax assessment), so his downside is limited. Then he is selling them to buyers who banks would not loan to! How does he do this?

The home purchaser, who for whatever reason did not have the credit to qualify for a mortgage, pays my friend a rent payment, a portion of which is set a side as future equity in the home. At the end of two years, if the purchaser is up to date on all his or her "rent" payments, a bank will offer that person a mortgage on normal terms. At that time, my friend is paid out by the bank for his initial investment and makes a profit on the difference between what he purchased the house for and what he added to it and the amount for which it ultimately sold.

The bank is willing to deal with the purchaser because he or she has proven his or her credit issues are in the past. The bank is willing to give my friend the initial mortgage because of assets he has to secure them but also because of the prices paid for the homes (lower risk). This is just a case of an entrepreneur going to a local bank and the two parties sitting down and working with each other in good faith. One of the roots of American entrepreneurship!

A lot of these community banks exist and have capital to deploy. A lot of private investors exist and have capital to deploy. I am not suggesting we wait so these players pick up foreclosures, but this same type of private investment/work-out can be done on normal mortgages/homes that are in negative equity without punishing the person's, who is underwater, credit. And I believe it could be done in scale. The bank holding the mortgage will take a hit, but they made the poor decision in the first place. Something Geitner did seem to acknowledge.

There is no reason private investors cannot approach banks holding the mortgages and work out purchases at lower prices. The private investors can then establish new affordable mortgages, possibly with the existing homeowner, and start the pattern of on-time payment discussed above - eventually having the homeowner re-mortgage directly with a bank. In the process, hopefully a market bottom would be set. I cannot tell you it would not be a "lower low", but it seems like a reasonable method of price discovery to me. And the government would not need to pump in a penny!

-2outof4