I’ll go on record saying this is the first good bailout idea I’ve seen. It will lubricate the market by allowing the banks to tap into some of the potential value they are giving up by writing down a loan. Why should a home buyer who got in over his or her head get a payment break now because they can’t afford it and have the potential to reap a large gain down the road.
This increases the odds of a workout and also prevents a maverick borrower from excercising a put option from the bank while reaping all the upside.
I think it’s a great idea-good for all. Too many on this board are out for pain in the market and pain for individuals with impunity. If there is a reasonable economic solution for all, it should be pursued.
Where I do part company, however, is the part where the government buys the loan. I think the negative equity certificate is a nice idea to help the banks work things out., but that the government should avoid a bailout of the loan itself-nanny state versus market innovation.
