My (Partial) Solution to the Housing Crisis

Prologue.
I had a serious idea the other day, and I ran to my computer and jotted it down before I could have a senior moment.  So what follows is not intended to be funny, and does not intend to point fingers at bad guys.  All I want to do is to try to offer a possible solution to a devestating problem.  As the title indicates, it still is not a complete solution, but potentially goes a long way to mitigate most of the problem.  If you think the idea outlined below has merit, let your congressman or governor or somebody like that know about it.  It might even be improved upon.


The ongoing housing crisis persists because of four issues which were not a concern before 2007:

1- There are a very high number of foreclosed properties in all price ranges, which are simply sitting unoccupied,

2- There are not enough buyers for these foreclosed properties, at the price the mortgage companies are currently willing to sell

3- It has become difficult for real estate investors to have the capital on hand or the necessary borrowing ability to purchase the properties. (Yes, some do, but nearly enough). Furthermore, it has become difficult for these investors to make a profit on these properties either by selling them to a third party, or renting them out.

4- Property owners in the vicinity of these foreclosed properties are concerned that, whether these foreclosures are sold or not, the value of their own properties will decrease, robbing them of the equity they had prior to 2007. This is especially true in the homeowner market. Mortgage companies also may be reluctant to put all of their foreclosed properties on the market because of the negative impact it would have on neighboring property owners.

In order to resolve this problem, the rules of buying and selling properties need to be altered to reflect this new reality.  To that end, I offer the following strategy to mitigate the housing crisis.

a- Have the mortgage companies sell the foreclosed properties at an 80% (instead of 30-50%) discount.  This will encourage investors to take a larger number of the properties off the mortgage holder's books.  It will also make the properties more profitable to investors.

b- Only compare foreclosed properties with other similar foreclosed properties when estimating comparable value (or "comps") for purposes of resale or refinance or equity loans.   Essentially, this puts the foreclosed properties in a "Comp Coocoon".

c- For property tax purposes, allow these properties to reflect "open market" as its tax basis.   For income tax purposes, allow these properties to depreciate from it's "open market" value. This will help protect owners of non-foreclosed properties from losing property value.

d- Improvements made to a "Comp Coocoon" property increase the value of the property the same as for any other property, and are thus exempt from the Coocoon.  This will encourage an investor to improve the property.

e- A foreclosed property, once sold to an investor, remains in the "Comp Coocoon" for a period of 10 years.  After that, it is treated the same as any non-foreclosed property. This should encourage an investor to hold onto a property longer (and thus help stablize a neighborhood) in order to maximize his profit by selling at "open market" prices, rather than the "Coocoon" price. 

The window for such a strategy should be limited, assuming the foreclosure problem as it is today is of limited duration.  A 5-year window should be enough to move the vast majority of properties off the books of the mortgage companies.

Epilogue:
The solution outlined above does not directly address those property owners who have been making the mortgage, but are in danger of slipping into foreclosure.  Sorry.