Meet Joe and Mary Nonhomebuyer

Joe and Mary Nonhomebuyer are living in a nice two bedroom town house that they bought in 2005.  It fit their budget comfortably, and they were able to make a 10% down payment, which was more than most first time buyers in 2005. They have been comfortably making their payments and enjoying their home for almost six years.

They have been blessed with two beautiful children who will be starting school in a year or two. They are happy, responsible, and doing OK financially.  It is getting a little crowded in the town house.  They feel that they are outgrowing their home and would like to move to a larger home across town in the school attendance area they prefer.

Of course, they are going nowhere.  Their 90% LTV financing is now 120% LTV.  If they want to change homes, they will need to come up with large pile of cash, cash for payoff, cash for the down payment on the new home, cash for selling expenses.  It's not going to happen any time soon.

Joe and Mary have managed to save enough for a down payment on a new home, 10% just like their current home.  It will be years before they have saved enough to cover the payoff and selling expenses on their current home.  Wouldn't it be great if they and others like them with excellent credit could exchange their home and its 120% LTV financing for another "move-up" home with 110% LTV financing? 

Allowing transfer of negative equity from one loan to another would go a long way toward helping the housing market get restarted.  I think it would help all parties involved.  Banks would benefit by improving the relative equity and receiving higher monthly debt service.  Buyers and sellers would benefit by being empowered to choose to move up to a home that better suits their family's needs.  The industry would benefit with more buying and selling activity.  The result would be more of a stimulus to housing than anything that has ben tried so far.

So, what would is cost?  I don't know for sure, but it may cost zero.  Maybe banks will need some kind of incentive to make 100% plus LTV loans.  Maybe not.