New York University professor Andrew Caplin states that this country's lending institutions have been creative in only a very narrow way, and feels that they have lost ambition to find other ways to provide mortgages.
Here are five suggestions for ways banks could reduce the risk of foreclosures:
1. Shared appreciation. The owner of the home agrees to share the profits on the home if he indeed sells the home at a profit. This particular idea is popular in Australia. Some U.S. banks offered what are known as shared-appreciation mortgages in the '70s. the IRS never clarified whether payments to outside investors could be viewed as tax-deductible interest, and in turn left home buyers nervous about these types of mortgages.
2. Hedge with short sale. The owner of the home would short a regional index of prices of homes. If the bank held the futures position in escrow, the bank could reduce its risk of loss. If the owner of the home had to sell the home, he would make enough on the short sale to cover the decline in the value of his home.
3. Offer puts. The owner of the home purchases insurance against a decline in regional housing prices. In Syracuse, New York, a non-profit organization called NeighborWorks America is doing this. The idea however, has not caught on in other areas.
4. Vary duration, not monthly payment. Keep payments at a fixed amount, but translate an increased interest rate into a longer mortgage term.
5. Treasury inflation-protected mortgages. Similar to TIP bonds, the mortgages would have monthly payments that increase slowly even when interest rates are rapidly increasing. This type of mortgage is prohibited in some states.
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