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Vol. 94, No. 2 (Posted 2012-03-01)

How Home Loan Modification through the 60/40 Plan Can Save the Housing Sector

by Manuel S. Santos

Many well-respected economists have suggested plans for mortgage restructuring built on the idea of share appreciation mortgages, which generate rather complex transactions with conflicting interests between the lender and the homeowner. The 60/40 Plan, however, combines several economic principles adapted to the nature of home loans and appears to provide all the benefits but fewer of the drawbacks of many of these programs, including current government programs such as the Home Affordable Refinance (HARP) and Home Affordable Modification (HAMP) programs. For example, HARP home- owners must service the entire principal balance and meet additional eligibility restrictions that are not warranted by economic considerations. In contrast, the 60/40 Plan provides for affordable monthly payments by restructuring the debt into two parts, has relatively minor eligibility requirements, and creates household incentives to maintain the property. Failure to address the current financing needs of the housing market may result in a decapitalization of the banking sector, lost potential house value for many homeowners through foreclosure, and an extended episode of low growth for the U.S. economy.

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