My Own Probably Completely Unworkable Solution
OK, now that I’ve skimmed most of the 100+ page bailout plan (most of which, as is in the case in all government legal stuff, a bunch of blah blah blah - and warning, do not operate heavy machinery after reading), I can see that it’s clearly not the end of the process and isn’t intended to be. I have a thought, though, and I humbly submit it to you.
Before that, though, I did want to mention that those golden parachute limitations for fat cat executives are not quite defined in the plan - are you surprised? I was hoping that some kind of wording to the effect of “any deferred compensation packages for senior executives in an institution that is taken under federal control are immediately null and void.” I was also hoping for salary caps for CEOs but that’s not there either - these politicians might actually be in the private sector again someday, doncha know. They don’t need to be cutting off their future income.
Anyway, here’s my idea -
Refinance/renegotiate (at no consumer net cost) every single outstanding mortgage to current housing market levels, maintaining the percentage of equity ratio between lender and homeowner, into a 15-, 20- or 30-fixed rate mortgage.
Use the homeowner’s most recent mortgage appraisal as the starting point for determining equity percentages and existing data to do a general percentage home value adjustmentfor a neighborhood.
Losses are shared - lenders lose interest and principal and homeowners lose equity dollars (but maintain the same percentage of ownership).
Example: John and Jane Doe bought their home in 1995 for $150,000 and initially took out a loan for $120,000 (80%) at 6.5%, making their payment about $760 a month before taxes and insurance. In the early 2000’s, they both had good jobs, their home value appreciated to $300,000, and they used the equity to consolidate some other debt and payoff student loans, putting their total mortgage debt at $225,000 (75%) and a payment of about $1425.
Since then, the bubble has burst. The value of the home is now $250,000, making it almost impossible for them to refinance into another loan because they don’t have enough equity - even though they still hold on to the false belief that their home is “worth” $300,000.
Under this plan, the balance on their mortgage would be reduced to 75% of $250,000, or $187,500. They would be required to take on a fixed rate mortgage and would be barred from refinancing the loan or taking out an equity loan for a certain number of years.
That’s it. Any questions? Of course …
1. This seems like it gives homeowners who have overextended a bailout. How about some personal responsibility? It sure does look like that, doesn’t it. But given the screeching across the country this week, it sounds like that’s what people want - “where’s my bailout,” right? But besides that, it does provide a bit of relief. It reduces mortgage payments and would allow many to keep their homes without going through a whole court mess.
2. What about people who own their homes outright? What’s in it for them? Well, since most of those people will tend to be older and are facing scary health costs, I’d be fine with saying that for the next five years, they get a dollar for dollar credit on their property taxes.
3. Renters? Hello? What about them? No direct benefit, but renters have been impacted by this fallout as well - owners of rental properties that go into foreclosure means eviction for renters. Also, a general reset of home prices and mortgage values would put downward pressure on rents as well.
4. Does this apply to second and third (or however many McCain owns) properties? Nope, only primary residences. If you got in over your head on investment property because you watched infomercials in the middle of the night, that’s your problem. The only partial benefit you get is that if you used your primary residence to finance a second home, you’ll get a break as that primary home mortgage is reset, but your investment home mortgages remain as they are and if you can’t afford them, they go on the market.
5. My house is in pristine condition with beautiful handcrafted wood details and stained glass accents and my next door neighbor’s house is “Plain Jane.” How could you possibly compare the value of the two homes? Well, for one thing, homes that have been cared for spectacularly will actually come out ahead in this deal because they’ll have the bigger actual decrease in mortgage amount. But besides that, your real estate agent will probably tell you that sometimes investments in your home don’t pay you back and if you’re going to do them, you do it because it’s important to you and your family.
6. I still can’t afford my home even under this plan. Well then, time to sell.
7. What does this do to help the economy as a whole? It seems like most of the blather about this crisis comes from mortgages that carry high default risk. This plan would hopefully reduce that default risk by directly lowering house payments.
8. Wouldn’t it be incredibly difficult to undertake this plan? Probably, but nothing up to this point has sounded particularly simple. This would have actual lasting impact for homeowners, it is equitable both to those who have been responsible about their debt and to those who maybe overextended by reducing the amount of the mortgages on both. There is already data out there about general pricing broken down my neighborhood, I’m sure we have the brains to handle this.
9. But what if the mortgage amount DOESN’T go down - what if I bought my house 20 years ago and haven’t refinanced and the value of my home has actually gone up? You’re not going to RAISE my mortgage, are you?? No no, no raising of amounts for long term owners who have showed that kind of staying power. Extend the property tax credits to you too, you deserve it!
10. Won’t this cost the banks and mortgage companies billions? Probably, but it doesn’t sound like there’s too much kind feeling towards them anyway, and besides - collections and foreclosure isn’t cheap, and it might cut down on THOSE costs.
11. What about the mortgage brokers out there - cutting out all refinances for the next several years will kill the business, won’t it? Kill the business? No, but it will cut it back quite a bit. There will still be buying and selling of homes, but yes, an imposed moratorium on refinancing will knock quite a few people out of the business.
12. Why the fixed rate requirement? What’s wrong with adjustable rates? Well, for one, it adds confusion the the markets - too many people have been sold adjustable rate mortgages under less than transparent circumstances. It also creates an environment where you are gambling with what may be the biggest investment you ever make. Personal responsibility or shady mortgage brokers aside, your home shouldn’t be a risky venture.
So there you go. Whaddya think?
posted in Debt, Economy, Politics | 6 Comments
















