There was a fairly simple solution to the real estate crisis without taxpayers flipping the bill...

[Kevin Keithley]

Declare 28-36 Debt-to-Income [DTI] Qualifications to underwrite mortgages in default facilitating mark-to-market holdings for Financial Institutions. Those homeowners who cannot qualify for at least 75% of what they originally borrowed under 28-36 DTI, sign Deeds-in-lieu of Foreclosure for lease-purchase agreements with note holder(s) at fair market rent with purchase rights at today’s market value (market value is based on others in market who can qualify under 28-36 DTI).

Qualify the loans and the real estate market and values settle out while credit and trust are restored in MBS producing financial market stabilization. The 25% write-down is backed by the U.S. Government. This 25% is substantially less than the bailouts to date. Banks and servicing agents are already in place for underwriting and non-performing loans become qualified so values are validated. This entire process could take 18-24 months but with immediate impact as this plan is less costly.

I may be the only one in the world who ever purchased their own mortgage at a deep discount and then sold the collateral for significant gain. I’ve learned one thing: He who controls the debt, controls the equity. The lease-purchase deals work to stabilize home prices and prevent vacant properties while the owner(s) (U.S. Government and/or Lender) avoid an expensive foreclosure process to have the property back on the market for those qualified at outlined above. The lease-purchases can be securitized and as long as accountable underwriting occurs, we’ll have captured the majority of “unknowns” in the real estate market and confidence is restored. I cannot emphasize it enough: We have to go back and underwrite what was not done the first time around. Simple. You make your money in real estate when you buy. If you don’t see it going in, you won’t see it going out. Same applies when lending.

What form does the backing take? [e.g., Direct reimbursement by the government to note-holders of 25% of the total amount of mortgages in default?] Given bailout money extended so far, direct reimbursement by the government to note-holders is the salvation du jour but direct reimbursement in my opinion promotes moral hazard. If we do it, “what the heck” at this point…it’s still less than the other plans.  My take:  Mortgage Insurance. One contract paid by the borrower to the Government for insuring whatever percentage of the write-down attributed to the borrower’s financial situation is and the remaining percentage (to address the 25% in total) is covered by an insurance contract between the note holder and the government. The premiums collected provide affordable “skin in the game” by the borrower and note holder while offsetting some costs by the government.

Whether the resolution for the defaulting homeowner is getting re-written at 28-36 DTI with payments they can afford or to the homeowner who takes on the lease-purchase contract where they can stay in the home and preserve an equitable interest, the paper can be securitized and with mortgage insurance, downsides protected. The caution is not to have lax underwriting at any juncture because of moral hazard. Each link in the mortgage chain receiving any collection of profits while believing it is passing on risk will get us back on the train tracks to Hell (i.e., “credit crisis 2.0″)