Why should home owners pay for money that has evaporated the same thin air from whence it came?  Speculators inflated the value of real estate  by the collusion between the  vendors and the mortgage originators.  The so called money that paid for these mortgages was actually fluff obtained from Fanny and Freddy, and other dubious off-shore "accounts".  We should not spend a penny of the US taxpayers money in covering speculators for these fraudulent practices.  

The current mortgage reset proposal would not throw good money to the speculators. it is a non-funded solution to a serious problem that must be corrected as soon as possible.  Home owners must be able to buy and sell their properties at market value, without having to fund negative equity balances that arose from speculation that, more often than not, was not caused by them.  The conditions that home owners must meet, at this conjuncture are:

• The property must be occupied by the mortgage owner and his/her family.  This vital provision will not allow home speculators, known as "flippers", to benefit from this mortgage reset, nor would it allow those with second homes, vacation homes, landlords with rental properties, or home builders who overbuilt properties they can no longer sell.

• The mortgage must be viable in it's current terms.  Mortgages that will be reset must be viable in the terms specified, that is to say, interest rates and all other payment terms.    The only reset that will be done is to the outstanding balance of the mortgage, therefore allowing for lower payments, but for the same interest rate and months/years outstanding. The homeowners must re-qualify for the reset loan, and prove their income under strict new loan origination guidelines.

• The FHA will insure the mortgages.  No refinancing will be required, because this is not a transfer of deed from the mortgage processor and/or debtor to the home owner.  Since the mortgages are means tested, foreclosures in of the new mortgage reset should be few.  Home payments will reflect the true value of the property, not the inflated value that was created by the speculative frenzy during the Bush II administration.

Some amendments that could make the legislative process flow better may be:

1. FHA should be means tested. Allow FHA insurance to be granted only for those homeowners who would qualify under the normal FHA rules, letting other more affluent homeowners purchase their own PMI insurance if required by the lending institutions involved. 
2. The financial burden must be shared by all parties. If the homeowner has a second mortgage or HELOC line of credit with an outstanding balance that, combined with the first mortgage, exceeds the current valuation of the home, the reset should also be applied to the second mortgage, in the same proportion as the three factors involved in the home equity equation: Total Valuation = mortgage balance +  HELOC balance + homeowner equity.  That is to say, all resets should be pro-rated in same proportions as the 3 parties in the home's equity, all must share the burden.
3. The resets should be regional. Home mortgage resets should only be done for those mortgages that were originated in the speculative period  for each region of the country,  by the percentage of speculation that affected each market.  For example, in Florida, mortgages that were originated after Florida Day-Zero should be reset to a value corresponding to the valuation of the homes on Florida Day-One, that date in the future when it is determined that the market  has expelled enough gas from the area's home valuations as to make them "real" once again.  Each market has a valuation curve that can be computed:  there was a point in time when the valuation became speculative and exceeded the traditional mortgage growth for the area, and there will be a point in time when the valuation reaches the point where the  canonical growth slope intersects with the real valuation once again.
4. Derivatives based on MBS must reset their nominal values. It may become necessary to reset the nominal values of those exotic hedge fund securities that are priced based on bundles of mortgage collateral.  This is a technically simple matter of reseting a nominal value and assigning an additional "Greek:" derivative to the once static nominal. There would be no money "lost", because it did not exist in the first place, it was simply a nominal value in a derived instrument, once that can be redefined,  perhaps leading to new and exiting  possibilities for those investors who spend their life investing in non-existent financial entities.  This is not a financial problem, it is a technical problem in the pricing models of the derivatives market, which were created based on the assumption that home mortgages never decrease in value.

I am sure that there are numerous ways to solve this problem under the premise that no  good money will be spent on mopping up the mess.  The money is gone to where it came from, so what is the problem?  It is time to be creative.  Money does not rule us, money is information, we should rule information, or have we lost our heads to it?

Atlanta, GA
Apr 2, 2008