There are a lot of people who have gotten “unlucky” recently, in one way or another, and are finding themselves unable to make payments on their debt because their income and expense equation is no longer what it used to be (i.e., their income is down, or their expenses are up). Of the millions of homeowners currently not making their full monthly mortgage payments, it’s hard to tell which ones were unlucky, who got defrauded or lied to, and who just plain made a stupid (intentional or unintentional) mistake and bought something they couldn’t really afford.

So who – of the large number of people that aren’t able to make their currently monthly housing payments – should get to keep their home and who shouldn’t? This is more than a million dollar question and we’re having a helluva time as a nation trying to answer this question, in policy and in practice, fairly, systematically and timely.

There are currently a myriad home retention programs implemented across dozens of servicers nationwide, and if I had to pick one word to describe the current landscape of options made available to troubled borrowers, I would pick “complicated”.

I think if we could come up with a simple common sense rule of thumb to answer this key question, we would be much further ahead in stabilizing our housing market. So in the spirit of proposing solutions instead of criticizing current approaches, here’s my simple solution to this problem:

If you can afford the home you currently live in at its current market price with loan terms based on current (historically low) market housing rates….you should get to keep it. If you can’t, you should move on and find rental housing that you can afford based on your current financial reality.

How would I achieve the above if I were designing our national housing programs? I’d keep it pretty simple (although I acknowledge that making it so would be rather complicated and time consuming…with no guarantee of success):

1. Do principle write-downs to current market value for all troubled borrowers who can afford their home on current market terms…but in return for this (massive) accommodation…require them to give up 75% of future home equity appreciation back to the investors who took the loss resulting from the initial principal write-down…until the investors are made whole. After that point, allow the homeowner to keep any remaining equity upside.

2. Allow every other owner occupied troubled borrower to sell their property via a servicer offered short sale accompanied by a cash payment to help the family move to affordable rental housing. Forgive the “deficiency” for these borrowers including any tax that might be owed on the amount forgiven (most families in trouble can’t afford a hefty tax payment anyways, so this would only push them further into the hole)

3. Allow every other non-owner occupied borrower to sell their property via a servicer offered short sale, but with no cash payment and no automatic forgiveness of deficiency

Would we likely require a new governmental entity/group to track the details on the principal write-downs and resulting future home equity appreciation share on behalf of impacted investors? Yes.

Is this simple proposal difficult to gain agreement on? Yes…very difficult. But no more difficult than it will be to deal with the millions of avoidable foreclosures that we will experience otherwise.