In a widespread medical emergency, the practice of triage is often 
brought out. This policy assigns each “victim” to a group – those
most likely to survive, those most likely to NOT survive, and a
middle group. Precious medical resources are devoted first to those
most likely to survive. The policy comes from the military, where
having a soldier back up and fighting made the most sense.
Resources spent on the other two groups was, in military thinking,
not as wisely spent. Can we learn anything from the military that would be useful in other
areas? Perhaps so… Consider the foreclosure mess. How would the military handle it?
Some background…
If you were to stumble upon some old Confederate States of America money, how far do you
think you might get trying to use it to purchase goods or services? Not far, unless you found
an antique papers dealers, and he was short of CSA money. Otherwise, you have bad
paper. It is just not worth much at all, with limited likelihood that it ever will be worth anything.
Now let’s say you have a private loan out to someone with no job, numerous bad habits, and
headed down a rough road. Yes, you have a note, a loan, but it is not going to be paid any
time soon. You have bad paper.
Let’s say you work in a bank, making loans to small businesses in the community. At the
urging of upper management, you “soften” your lending criteria, and make loans to some of
your college buddies who want to open a beer keg cleaning business (or any other frivolous
enterprise doomed to fail). Sure as heck, that business goes bad, and now you, the bank,
have bad paper. Your college friends have burned thru the money, and scattered to other
endeavours, never to be seen again. You have bad paper.
The corollary here is that a note, a loan, is created to ensure repayment of the debt. When the
obligor, the person who owes the money, no longer has any skin in the game, that note has
gone bad. The likelihood of repayment is near zero.
With so many mortgages underwater, now the banks are holding onto bad paper. Yet, these
same banks ask the homeowners to continue making payments on this bad paper, under the
threat of a credit report “hit”, and in some cases, pursuit by debt collectors. The homeowners,
needing a place to live, in many cases will continue to struggle and makes the payments.
Many families just leave, making the problem worse for all concerned – the banks, the
neighbours, and their credit report.
Okay, the picture is painted.
Now what is the solution?
The proposal here is that the underwater homeowners, the holders of bad paper, be
incentified to continue to make the payments. Specifically, they should be offered a re-work of
the loan, as follows: whatever the difference between loan amount and current value would
become the portion we’ll call bad paper. For example, a home with a note of 300k might really
be worth 200k. That difference of 100k is the amount we will deal with, as bad paper. From
this point forward, for each year that the loan remains current, the balance of that bad paper
is reduced by 10% of the original amount, in this case, 10k. This reduction does not come into
play until the loan is paid off, so the investor is not harmed in the meantime, although for
internal purposes, the investor can calculate what is likely to be repaid. The monthly payment
amount is not changed. All we are doing here is incentifying the homeowner to continue
making payments of good money on bad paper, “spiced up” with optimism that equity will
return in time. The alternative is to get more of the same garbage we are currently receiving
from the banks.
Will it require some form of governmental participation? Perhaps… But again, the “solutions”
being fed to Americans right now by the banking industry (guided by the greedy fingers of
government), are having very limited success. We need some other course of action. So far,
all we see are programs to “help” those who are not likely to be saved anyway. This program
focuses attention on those families who are on the fence, those who are in a monthly game of
Stay or Go?
So, in a nutshell, I want to establish a triage system for homeowners with mortgages. Stop
playing games with the “near death” group, and devote some effort to those who are most
likely to benefit. Let’s help those who are most likely to help win this financial battle we are
all in.
There are other solutions out there, and we can hope that at least one of them turns out to be
the magic pill to get us past this mess. But, as the saying goes, “hope” is not a strategy. We
need to change how we are thinking about the problem, and not be afraid to utilize some
strong medicine, courtesy of an idea borrowed from the military. As always, I could be wrong.
Photo courtesy of jscreationzs
