As government officials in Washington, regardless of party or purported economic philosophy, continue to stumble around and further weaken investor confidence, I’ve been on the lookout for some truly innovative thinking. John O’Brien of UC-Berkeley’s business school has an intriguing idea he’s seeking to turn into a business model: fractional ownership of homes. Investors would be able to purchase shares in home equity, thus giving them the ability to diversify into housing stocks (so to speak). Prospective homeowners wouldn’t have an all-or-nothing set of options — renting at zero percent ownership or owning 100 percent of the risk and reward. Offering a third option could facilitate homeownership for some households of moderate income without having to resort to government guarantees or secondary-market interventions. Both are problematic “solutions,” as taxpayers have come to discover to their detriment.

O’Brien explains the concept of a Home Equity Fractional Interest (HEFI):

Across America, millions of families want to stay in their homes but can’t keep up with the mortgage payments – often risking foreclosure. But it doesn’t have to be that way. If the owner can afford the bulk of the monthly payment, the mortgage could be restructured into a reduced loan corresponding to a majority ownership stake of the home’s current market value – with the difference covered by a HEFI security. Because the owner would now have equity in the home (previously, the mortgage probably exceeded the home’s market value) and a sustainable mortgage expense, risk of foreclosure is greatly diminished. Significantly, because the homeowner “pays” for the mortgage reduction with the issuance of a HEFI, there is no moral hazard. This restructuring is not a bailout, doesn’t risk taxpayer money, and is not unfair to responsible homeowners or renters.

Unfortunately, we’ll probably get more bailout baloney instead, as it has the irresistible attraction to politicians of enhancing their power. It is in their interest to embrace discretion and minimize innovation, while it is in the interest of investors and long-term economic growth to minimize governmental discretion — otherwise known as uncertainty — and embrace innovation.