Here is your chance to participate in solving the real estate bubble problem. I am going to propose some ideas for solving it and you can help me flesh out the details in the comments. I’ll even include your name in the et. al. when we publish the finished plan.
The home mortgage grantors should be willing to renegotiate the mortgages to a new fixed interest rate and a new principal amount. The new principal amount would be more in line with the real estate’s present lowered value. In return for the reduction in principal owed, the mortgagee would take out a reverse mortgage for the difference between the original loan and the new loan. Of course the bank would not give out any money for the reverse mortgage because they already did that when they financed the original mortgage. The free market could determine what if anything the home owner would have to pay as a fee for getting the reverse mortgage.
The grantor of the reverse mortgage would have ownership in that part of the house covered by the reverse mortgage just like grantors of reverse mortgages do today. The same rules could apply upon sale of the real estate. A purchaser could buy the property at the lower price knowing that there is a reverse mortgage holder on any excess of that price. Or the purchaser could pay extra to payoff the reverse mortgage. The amount extra would be negotiable with the bank.
For the part of the house covered by the ordinary mortgage, the home owner would be building equity just like any other home owner with an ordinary mortgage. In exchange for avoiding foreclosure on the property and avoding paying the monthly payment for the original mortgage, the owner would be giving up the right to profit from the rising home price up to some negotiable amount near the original mortgage.
The grantor of the reverse mortgage could sell that mortgage on the open market just like they may do today. The free market would set the value that it would be willing to pay for a reverse mortgage on the part of the house that initially is above the current value. This is how the banks that kept the reverse mortgages could value these mortgages on their books.
There could even be futures markets for these reverse mortgages. This would provide an additional way for the banks to make money other than just selling the mortgages outright.