interesting solution to the mortgage crisis

I have been saying for some time that the current economic crisis is actually a crisis of confidence not a fundamental problem with any particular business. It is a problem of Trust and Faith. things the scientific among us are very bad at managing. The core problem here is that investors have lost their bearings. The old “rules of thumb” are not working. Rules like “Bear Stearns and Lehman Bros are credible co-parties”. Rules like “A house is worth what the assessment says”. The basic problem is that money is frozen because parties are finding it too hard to assess the risk of lending it around. There is no way to come to a “clearing price”. The market is illiquid. So how do you set prices that everyone can agree on and get the risk takers to start taking risk again (probably for a higher price now). Well in home markets, Michale Lissack has an interesting idea: I like it, pass it on.

Fixing the Financial MessUGH!
Procrastination has led us to what may be a financial precipice, but there is a solution.A vast portion of the mess is caused by the mark-to-market accounting rule and the lack of liquidity (and thus a market and thus a meaningful market price) for uncertain and “tainted” assets (mostly mortgages, credit card debt, and related derivatives).
The mark to market rules ASSUME a liquid market and thus meaningful market prices. Such is not our present environment. It is too late in the gain to suspend the mark to market rules. That solution would have worked well a year ago, but today investors would merely be even more spooked by the uncertainty.
The solution lies in recognizing the shift between equity and debt which the market turmoil has created. Since the government now control Fannie and Freddie it also controls the very mechanisms to solve the problem.
Fannie and Freddie should mandate that every conforming loan outstanding be subject to an appraisal for the underlying property. If the appraisal suggests a loan to value ration in excess of 110%, it is time to recognize that a PORTION of the loan is in reality an equity investment. All such loans should then be subjected to a mandatory split such that 90% of the appraised value receives a Fannie/Freddie guarantee and the other piece does not. The first piece would have an established market value based on par for the principal and current interest rates. The second piece would become in effect participating equity. Banks and borrowers should have the option of exchanging the second piece for up to 75% of the future appreciation in the property valuing each 25% of future appreciation (above the current appraised value determined above) at 5% of the current appraised value of the home.

These two steps would restore value to perhaps 70-80% of the currently illiquid uncertain mortgage assets plaguing the US financial markets. The mess would be over.Please pass this message on to your elected officials AND your bankers.