This posting has been updated: Please read Mortgage Crisis Solution!
Two candidates for President are falling over themselves with solutions for the current mortgage, lending crisis. Their plans call for everything from delaying rate increases to throwing money at the debtors. This problem is really about supply and demand. Let’s look at these plans in a broad sense.
If we stay or delay the rate increases of the adjusting rates or give borrowers money to make payments, we must first solve the problem of who gets the juice – who benefits? Do we single out people who are 90 days past due and help them? If we do, then those folks 60 days past due will now have an incentive to make matters worse and become 90 days past due to qualify for help. If we help someone who paid no attention to their ability to pay, but jumped in any way, then how do we compensate someone who did not enter into such a mortgage, because they exercised good judgment – in essence, their tax dollars would be helping the person who got the house they wanted, because they chose to pass on the deal? Today’s candidates in pandering for votes want to spend your money on a problem that they clearly do not understand.
Yes, many subprime borrowers are out there in trouble – they are called subprime for a reason – did we or they expect anything else? The true victims of this crisis are all the homeowners who are now trapped in their homes due to the equity position. The value of their residential property has precipitously dropped. Whether they are investors for rental properties or occupants of their dream home, we are all being hurt by this loss in home values. So what is the solution? Senator’s Obama and Clinton, Senator McCain, President Bush, and Congress are you listening? The solution is to raise the property values and not just throw money at selected people in an unbalanced approached. Here is how. Raising property values stabilizes lenders, allows good payers now stuck in a property value vortex to be free to resell. Raising property values helps subprime borrowers, by giving them a chance to get out – sell and move on. Raising property values is the only equitable solution. How do we do this?
If the Federal Reserve took all the money being proposed by our pandering candidates, sweetened the pot and created a pool of mortgage money to be administered by FHA, Fannie Mae (if propped up by the Fed), Ginnie Mae, etc. for special mortgage lending, and made this money available for a one year period, supporting only 10 year adjustable arms initially priced at the 3.5% APR. Most homeowners stay in their homes for less than the ten year period of the ARM, thus over time these special loans would dry up and be repaid on their own. Qualifying borrowers could not be sub-prime – to qualify a tier I or II credit score must exist for each borrower. Any of the borrowers must be first time buyers. Only owner occupants after purchase would be eligible – these homes may not be rented to anyone while under the special mortgage. These mortgages could only be used to purchase a resale home from an investor/landlord or from an occupant – no refinances. Cap the maximum available mortgage at 120% of the median home price of each county where the home is located. Do not permit second mortgages or equity lines at purchase. Allow PMI (Private Mortgage Insurance) as a security for weak equity positions. Permit financing to 95% with PMI if all borrowers have tier I credit score.
This program would stimulate the residential housing market, create lots of demand, and start to bring home values up. At the minimum it would stabilize the values. Lenders would no longer have to suffer declining equity positions, they would be able to use the equity liquidation remedy against delinquent loans. Credit troubled and financially troubled borrowers would now start to have a way out as home prices rise.
The affect on this rise in home values would secondarily lift new home sales and actually stimulate that industry. This property value stimulation is the most equitable and most effective way to achieve what is needed, a stabilization of the residential housing market, and it can be instituted within 60 days or less.
well ken, lets do something thats even simpler then that…lets change the rules of buying real property …. specifically no loans longer then 15 years ever….after the collapse, some guy will want to build something that works in those paramentors…someguy will want to sell his building materials inside those paramentors..and then we start all over.The banking law change could not be changed without a national referdum….
Many believe the economy won’t improve soon unless the rate of housing
foreclosures reverses course.
Consider this idea:
Allow the FED to directly purchase and rewrite a portion of any mortgage where a homeowner is turned down on his re-finance application.
It should be documented by the lending institution that the applicant has no other supporting assets to assure the payment of his debt, but otherwise has acceptable credit scores and a regular income which may be acceptable to the ‘Government Assist Corporation’ (Imagined conduit for my solution), and will likely be facing foreclosure without some assistance.
Here’s the basic proposal:
The homeowner who applied for, but is turned down for refinancing, (Can’t qualify with stricter lending standards) obtains a form from the ‘qualified lender’ who refused the refinance, stating the reason for denying the re-finance. This document is submitted to the ‘Government Assist Corporation’ (aka GAC) created specifically to dispense, track, make recommendations, etc. toward it’s lending mandate.
If the borrower qualifies with the GAC (minimal qualificatons – has a job and otherwise acceptable credit scores and can meet the monthly obligations) then the Government Assist Corp. would PAY OFF 1/2 of the homeowner’s mortgage debt. This payoff would be subject to note-holder’s agreement to re-set that loan at the same rate, same amortization period, but for ½ the amount. (Otherwise of course the minimum monthly payment would not change.) Simultaneously at pay-off, the Government Assist Corp. puts a 2nd lien against the property in favor of the GAC, with proceeds payable to the Dept. of the Treasury. The 2nd is to be written amortized out to the end date of the first and the interest shall be HALF the interest rate of the 1st (or some other reduction designed to create the effect I’m targeting).
For example 50% of a 6.6% original note is paid off, then the second, GAC loan is written at 3.3%. The re-written wrap-around payment should be approximately 75% of the previous.
The homeowner will be paying off the 1st and 2nd concurrently just as a Wrap-Around Mortgage is paid. A collection escrow might be set up with the GAC to ensure compliance oversight.
Benefits hoped for:
The 1st note holder’s position is substantially strengthened by receiving ½ the balance on the note. It’s assumed that written cooperation to re-set that payment will be had.
(The 2nd note would be made ’subject to’ the re-writing of the 1st.)
By involving the GAC to loan at ½ the rate of the 1st the payment should be reduced approximately 25%. (See your amortization table.)
Furthermore, if these new loans were made ‘Assumable’ by borrowers who nearly (let the GAC be the judge) qualify for current stricter standards loans, then more homes could be saved from the ‘Short-Sale/Auction process so devastating to the current economic situation.
This lower rate is lent directly by the government and returns directly. The rate pays about the same as a 20 year T-Bill. Loses should be minimal and the dressing goes right to the wound.
The objective is to reduce the rate of foreclosures by assisting homeowners as much as is feasible. Given enough lift to our sagging cycle of foreclosures, the truthful perception will be that the rate of foreclosures is declining. That news will motivate Buyers to take advantage of low housing values and super low rates before the best deal are gone.