How would this work? Would the bank look for rent on their part-ownership? In Johnny's case, the amount of negative equity could be the current value of the house so to get rid of negative equity, the bank would end up owning the whole house and the owners would still owe the negative equity amount. And as this thread seems to bear out, the negative equity problem is at its biggest when the owners want to sell and move on, not when they want to stay in part-ownership with the bank.2. What I mean by debt for equity swap is that the bank take part ownership of the house in exchange for a reduction in the loan outstanding. Again the mortgagee could always reverse this in the future or they could sell the property in the future as joint owners with the bank.
"owned" by borrower|250|125
"owned" by bank|0|125
Mortgage|500|375
Negative Equity|250|250
Ignoring the small capital repayments which would have paid down the mortgage a bit since it was taken out: mortgage 500K, value 250K, NE = 250K. So bank buys half the house for 125K thereby reducing the mortgage to 375K but there is still NE of 250K. Some big problems I see – (1) the bank (taxpayers) should be entitled to rent on their investment otherwise it is just another form of handout, (2) the banks don’t want to be in the business of owning and maintaining small properties (who pays for house insurance, who pays for upkeep, home improvements etc.), and (3) fast forward a few years and maybe the owners want to sell – what sort of veto do the bank have over the price they get for their part-share? Can they say, no, we want to hold out for more money or do they just accept what the owners can sell for? I would foresee massive hassles which the banks, frankly, can do without.
I would have no problem with the banks lengthening the term of a mortgage – but the banks don’t really want to be in the business of evicting OAPs when they no longer earn enough to service a mortgage. It’s all very well thinking that everyone will be honourable and do the right thing, look after the house well and sell when the time comes but they won’t.