Saving Home Mortgages
with Deferred Principal
Instead of the current plan to "subsidize" mortgage payments,
it could be done by private enterprise and markets. Here's one idea:

Substitute equity for principal and securitize the equity.

Example:  A $200,000 mortgage on a home with a current value of $150,000, which had a value of $250K when the mortgage was issued.

Reduce the principal on the mortgage to $150K, in EXCHANGE for a deferral of the remaining 50K of principal until the mortgage is paid off (in 30 years; this WOULD be a rewritten NEW mortgage) plus some additional fixed amount (e.g., $10K) PLUS a percentage of any increase in value of the home above the resulting $210K on the mortgage (for this example, 25%).  This should result in lower and AFFORDABLE payments by the borrower.  (OR one might reduce the principal to just $100K and defer $100K, but take 50 or 75 or even 100% of the upside above the mortgage amount, as well as an additional $20K or $25K.)

Make the mortgage ASSUMABLE, so it's tied to the house, not the borrower; thus it is fairly simple to transfer to a new owner, NOT with a new mortgage, but picking up only the remaining payments.  (The sale price, of course, would take into account any increase in the seller's equity due to payments he/she/they have made at the time of sale; as usual, that price would be negotiated between the buyer and seller.)

Securitize the deferred principal, including the share of any valuation above the 210K, bundle it with others (with FULL transparency) and sell the resulting security to private investors, through a clearing house; investors will pay a market price, based on their perception of where home values will be in 30 years.  (This part is complicated, but no moreso than the securitization that happened that got us into this mess, since there was virtually NO transparency with those securities.)

Two huge caveats:  the devil is in the details and there will be unintended consequences.

This could be an alternative for my "Bailout Rescue Plan."

I suppose I ought to copyright this, so
Copyright © 2009 Robert J. Hezzelwood
First created:  February 12, 2009
Last updated:  February 12, 2009

Comments?  Email me:  rhezzelwood at