[quote=jficquette]
He is saying take part ownership now in exchange for loan modifications.
Basically selling part of the property to the Bank.
[/quote]
If that’s true, then it’s a horrible idea for the banks.
Ask yourself, what does part-ownership mean and what would be its value? It means nothing and has for all practical purposes no value.
Say the bank approached a “homeowner” who was struggling and said, “Ok, we’ll reduce your million dollar loan by 40% in exchange for owning 40% of the house.” Great, but what a can of worms the bank has just gotten itself into.
What if the person lives in it for the next 30 years, pays off the loan but never sells the place. Then when they die, passes their 60% ownership to one of their kids. All the while, the bank owns 40% but receives no interest or rent on their share? What’s the value to the bank? The bank also can’t sell this interest, after all who wants to buy a 40% stake in a house that you can’t live in and can’t collect rent from?
What if the person lives there for 5 years, and then puts in a pool and adds a cabana. Then two years later wants to sell. Does the bank get 20% ownership in the value of the improvements? The “homeowner” is not going to want to do improvements if that’s the case.
The most likely scenario though is that the house doesn’t appreciate any time soon, and a year or two from now the “homeowner” wants to sell. But the “owner” now only owns 60% of the house. Suppose the money from the sale is first used to pay off the loan, then there will be nothing left to compensate the bank for its share. (To see how this works, use some numbers. Imagine the original purchase was a million with nothing down. The house is now worth 600k, and the bank reduces the principle to 600k, and takes a 40% ownership. Without any appreciation, the house sells a year or two from now for 600k. That pays the loan but leaves the bank with a big fat zero for its “ownership” share)
It’s important to realize there is no new value generated by the bank taking an ownership stake in the house. All that really happens is the bank takes a loss through principle reduction, with a potential to maybe recoup some back in the future. But that potential is too dependent on the “homeowner” to be really worth much of anything.
Bottom line here is there is no free lunch that’s going to make things better. And “experts” like Taleb need to stop proposing things as if they will.
