Idea for solving the housing crisis
Most people seem to agree that something should be done by the federal government to stop or at least slow down the rate at which Americans are losing homes to foreclosure. As you probably already know, the root of the problem is that as these homes lose resale value, it becomes impossible for the homeowner to refinance their mortgage. A bank will not refinance a loan for $300,000 on a property that only sells for $250,000 right now. That’s the real problem.
My idea revolves around making the people involved, pay for cleaning up their own mess. I think the banks who made or own the loans should take a hit. I also think the homeowners who made the clearly irrational investment decisions should remain accountable for their bad investments.
Here is my idea for solving the housing crisis.
Through Fannie Mae and Freddie Mac, the Federal government should create a fund to purchase any qualifying mortgages near foreclosure. The mortgages should be purchased for 90% of the full principle balance remaining on the loan. This lets the banks immediately get any high foreclosure risk properties off their books. The banks would suffer the 10% loss. That should take all of the highest risk mortgages off of the bank’s books right away.
The second part of the program would be to allow homeowners to apply for a bailout if the bank chooses to foreclose at any time in the next ten years. The government would pay the bank 80% of the remaining principle on the loan. This would force the bank to take a major loss on the loan if they chose to not refinance the homeowner at rates he could afford. If the homeowner qualifies for the bailout then the government would assume ownership of the mortgage.
The government could then make every single one of these mortgages, in both scenarios, an interest only loan with the same number of years left till maturity. The homeowner then remains on the hook for the full principle balance of the loan, not the discounted amount the bank was paid. This is only fair as they were the ones who borrowed the money and bought at the top of the market. This is a fair trade off for being able to keep your home.
The homeowner then has the option of paying just the interest on the loan for the duration of that loan or else paying down the principle along the way. If the homeowner does not pay off the principle by the time the loan matures, they will either have to refinance the balance or let the property be sold at auction. If the homeowner defaults on the mortgage, after 90 days, the government will foreclose and sell the property at public auction. Just as in a bank foreclosure, proceeds from the sale would go to cover the principle balance of the loan. If the auction price falls short of the principle balance on the loan, the Internal Revenue Service would garnish the future wages of the borrower until the balance is paid. If the homeowner chooses to move or sell the home prior to paying off the principle, the government will immediately auction the property and hold the borrower libel for any unpaid principle. In either case, the homeowner would be allowed to keep profits on the sale if the property sells for more than the principle balance.
The interest rate should be set at the average 30 year mortgage rate available today. Right now that would be a little over 5%. If the homeowner cannot afford to pay an interest only payment on that low of a rate then they have no business living in that home. It is ridiculous for them to think so. Let them go back to renting until they get their finances together and learn to live within their means.
This system seems a lot more fair than any of the other proposals I have heard. It punishes the banks for making and owning poor risk loans. It allows working individuals to afford their homes even if on unemployment. It also puts the task of fixing the problem where it properly belongs; on the people who bought those homes at the ridiculously inflated prices. Let it be a lesson to the gluttonous greedy homeowners, there is no free ride in America. If you act irresponsibly by taking on too much debt, you will be held accountable. I equate it to someone who charges too much on their credit cards. If you borrow the money, you must pay it back.
Of course there would have to be some qualifying factors to participate. The plan should only be made available on loans if the property is the primary residence of the borrower. It should not be made available to investment property. The government should also have the right to sell the mortgage to the highest paying private sector company at any given time. This would allow the government the option of unloading the mortgage once property values increase.
This would be a limited duration program. Banks would only be given sixty days to sell qualifying mortgages to the government. After that time the only option available will be normal foreclosure where the government pays 80%.
Think about it. The taxpayers will earn around 5% return on their investment for fixing the housing crisis. Plus tax payers get the extra 10% or 20% of the loan principle. That is way better than any proposal I have heard from the Obama administration.
Let’s return America back to a time when our parents and grand parents saved money and lived within their means; back to a time where people used good common sense.