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Tuesday, March 4, 2008

My solution to the mortgage mess

Ben Bernanke spoke today before a group of community bankers in Orlando, Fla. He encouraged bankers to find creative ways to address the problems in the mortgage market. Preventing foreclosures, he implied, should be a priority as it would "help not only stressed borrowers but also their communities and, indeed, the broader economy."

Mr. Bernanke, here is my suggestion. Instead of banks reducing principal or instituting artificially low interest rates, why not have borrowers move into homes they can actually afford. If done in a coordinated manner, the process could cascade down from the most expensive homes to the least expensive. Essentially, everyone moves down a notch to a more reasonably sized home with a more affordable mortgage.

Those at the lowest end of the spectrum who, based on their financial condition, should never have become homeowners in the first place would be expected to return to the rental market.

This would keep the majority of troubled homeowners in a home of their own. It would keep the majority of homes occupied. It would protect most communities from a wave of foreclosure signs. The only downside would be those over-sized McMansions at the high end that may not be able to find purchasers as their over-extended owners trade down to an affordable house.

Instead of the government giving $150 billion away and hoping we all go to the mall, perhaps the money could better be spent to set up a program to help borrowers and banks make the arrangements necessary to carry out this process.

In the end, these homeowners would not end up with more house than they should ever have had by being bailed out by the government. I think this would make those of us who were prudent in buying our homes feel a little better about the fairness of the process.

1 comment:

Ryan Raven said...

Nice try, but how do you implement such a policy? Where do these "more affordable smaller homes" come from for these homeowners to go to and what determines the value of these homes?

They need to figure out how to purchase these instruments AND the assets for the current non-conforming (meaning loans not conformed to fannie, Freddie or FHA standards) at a discount from these investors, this means that some liquid assets of the american public would be reduced and the retirement accounts might be reduced, but unlike the existing open market system this gets these investors OUT of the mortgage mess and back on track to a more normalized investment portfolio and they could re-grow their investment back up to what it was. They could potentially loose out at a much greater amount by riding it out and not selling off to the government or take a 1 time KNOWN reduction.

The Government creates an offshoot of FHA maybe a 'division of' that can work with the homeowners of distressed mortgages and distribute the performing ones to another agency that could service the payments from these loans.

Create a temporary moratorium on foreclosures and create a method to that would allow for a borrower to apply for and receive a 'grant type' of loan that could be used to:

Pay down existing loan, bring existing loan current or assist with the refinancing of property to a better term with no cash to borrower.

This 'Grant' would not require payments, it could be given to homeowners in default or if they are current. The idea behind this 'grant' is to stabilize home values for all homeowners and allow cities and states that rely on property tax revenue to operate without as dramatic of a reduction in property tax revenue. This could forcibly 'correct' the real estate market and stop the depression of values in areas with high rates of short sales and foreclosures that effectively, chop the market in half when they sell properties at a discount.

This benefits the homeowners that do not have a mortgage, by maintaining property values and reduce the falsely reduced values that come with foreclosures and short sales transactions.

This benefits the homeowners that are not behind on payments by allowing them the same benefits as the above homeowner but also could reduce the debt they owe and could be used to refinance into a better loan or simply reduce the principle amount of the existing loan allowing for lower payment and the ability to, #1 free up some disposable income and gives the home owner the ability to put money into the retirement accounts that lost money getting these accounts back up to where they were before faster or #2 allows borrower ability to pay off other consumer debt they may have been having trouble with #3 Puts money into the bank faster for these people and allows them to start saving more money #4 Allows these home owners the ability to spend this savings back into the economy thus allowing the economy to start growing again (trickle UP theory)

Then obviously the benefit to homeowners that are in trouble and behind in payments that they can't afford, is that this helps reduce the debt and allows them an opportunity to correct the situation and get back on track.

These grants should be equivalent to approx. 20-25% of the value of the home. You might ask where this money for the grants could come from? Well first it would come from the $700B already in play, but this would not be enough to accomplish this outright and doesn't solve everything and create some issues.

Remember I said the Gov should buy up the non-conforming mortgage paper at a discount? This is where the funds for these grants could come from eventually replacing tax payer funding and repaying the tax payer funds used to pay out these grants.

Part of the problem with the Mortgage Backed Securities (MBS) is that the collateral (the actual NOTE) is not a part of the MBS so the actual MBS doesn't allow you to really do anything other than collect a payment as long as they are coming, you need the collateral package as well. So the government could make sure that the two of these are combined and purchased at a discount, say 0.25 cents on the dollar for each so they pay out .50 cents on the dollar for these items. This could be voluntary and if someone wanted to take a chance and not sell for 0.25-0.50 cents on the dollar then they didn't have to sell. There would need to be some provisions to require that if the government purchases the MBS that they would have to have the collateral package as well, it would be tricky but could be accomplished.

The Government entity, in this example a division of FHA, that services these loans both good and bad could go through and come up with some credit standards to be able to figure out a new Sub Prime loan model for those Americans with lower credit standards. These loans were not always poor performers, they just got to a point that loan-to-values were not protecting the individuals originating the loans like they used to because values were becoming flat and declining, making for those loans at 100% to become 110-140% LTV giving less reason for a borrower to want to retain the home when they become behind in payments and in some cases unable to sell so they can move for a better job or even as just a measure to reduce monthly obligations to better budget the family funds.

Sub-Prime loans have gotten a much worse rap than they should have, they did help a lot of homeowners and when the LTV (loan to value) is in line with the risk and credit they perform very well.

The government could take these mortgages they paid 0.50 cents on the dollar for and renegotiate the terms. With the .25% grants they would still have a 25% spread to work with for negotiations with borrowers and repayment for taxpayer moneys used. (this could be a temp or permanent program that could turn into a revenue source for government that could replace our tax system at some point in the future.

There are a lot of fine points that have to be made but this is the general overview of an idea I have and plan to try to get out and known.

Please email me with comments and suggestions on how to improve or get this into the right hands....

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