Just a simple Law that says ARM mortgages cannot reset from the Teaser rate AND the Base Payment (Principle and Interest, NOT the Interest Rate itself) will increase by 1% each year, the money applied ONLY to the Principle, until the mortgage is paid off or the house is sold.

Those with Negative Amortization Loans will have their payment adjusted in the first year to that of an equivalent Interest Only loan and the 1% provision will come into play in the second and subsequent years.

If the house is sold for a Profit above the payoff the Owner and Mortgage Holder will split it equally and if it is sold for a Loss they will each absorb one half of the Loss.

The Owner having to make payments to the lender until his half of a Loss is paid off and until it is they are NOT permitted to get another home loan nor may it be rolled into another one like they do on automobile leases with the deficiencies.

And like Child Support, Student Loans, and IRS Liens they will NOT be Dischargable in Bankruptcy.

The Reasoning is as Follows:

BOTH parties are at Fault. The Owner of the home for taking on more debt than he could pay when the ARM reset and the Lender for being Greedy and Stupid enough to give them the Money in the first place.

They BOTH need to share the pain.

The current Financial Crisis is caused by the Reseting of ARM Mortgages to rates that people cannot afford to pay and the consequent Foreclosures. Its the “Race to Foreclose” that is causing most of the problems.

The underlying asset… the house… is still there and people still need a place to live. If they are allowed to stay in it and continue to pay SOMETHING towards the principle and cover the interest… which even in an ARM’s teaser rate is often equal to or more than the lender would get in a CD today… Eventually the Loan will be paid off.

The owner gets to keep their house and the lender eventually gets all the money back.

Having each party share in either the profit or loss of a sale will even things out… the lender will get some of the interest they would have got if the ARM reset and the potential for having to pay back half of a loss will make people think twice about just selling out for whatever they can get and trying to stiff the lender.

Photo credit: stock.xchng.