Thursday, August 5, 2010

Mortgage Workout 4: The real urgency

China is warning the USA not to inflate the dollar. Economic activity is declining as unemployment rises and home prices fall further.

The investment banks are warning that the Fed Reserve Board is running out of options to fix the malaise and will soon turn to the problem of the GSE's Fannie Mae and Freddie Mac.... unless we focus laser-like on the problem a POLITICAL solution will compromise the recovery.

It is time for politicians to be patriotic and not parochial.

They MUST rescue the people of this great nation or the American Dream of home ownership will be lost forever.

They must do this for the benefit of the country. To do anything other than a clean fix aimed laser-like at the problem of home valuation is to charge the country headlong out of the current recession into a second Great Depression of unimagined magnitude and consequence.

Here is an example of how this would work to restore the great hope of prosperity for this great nation and the world:


The Smith Family owns a house with a current mortgage of $700,000 ( Smith had refinanced to take out rising equity). It is their primary residence - they live in it.

Smith household income reported on 2009 Federal tax return was $125,000 gross before any deductions (ie NOT their taxable income).

Current US 30 year Treasury notes have an interest rate of approximately 4%.

So, 30% of $125,000 means Smith can afford to pay no more than $37,500 per year or $3,125 per month for Principal & Interest on the mortgage. He is still on the hook for taxes and insurance.

Smith gets a new mortgage under this program with a 30 year term at 4.5% (4+0.5) for a nominal value of approx $600,000 (arrived at through DCF analysis based on what Smith can afford to pay).
This may/may not be more than the current appraised value.

The Government gets the right to 80% of the difference between $600,000 and the original mortgage amount of $700,000 when the house is sold.

Ten years from now Smith sells the house for $700,000 the value of the original mortgage.

He has paid about $2,900/month in interest for 10 yrs or $348,000 that has gone back into the US treasury.

He has also paid about $27,000 in principal.

He owes $573,000 on the new government mortgage, and $100,000 difference between his old and new mortgage originally financed by the US govt. ( The Treasury has already recovered nearly 50% of the amount loaned).

His gross profit on the sale of his house is $127,000.

He owes 80% of this or $101,600, under his mortgage contract so that the Government gets the $573,000 and its $100,000 back and $1,600 more.

Smith has had his property written down to a reasonable value and his mortgage therefore becomes valuable in a resale.

Banks and the Government can resell it.

Smith has lived with a new lower payment and still got the tax deduction for interest AND has made a profit on the sale of the home!

Most importantly, Smith is not tempted to hand the keys of the house to the bank because he is upside down in the mortgage.

The bankruptcy/foreclosure process is completely avoided.

There is a very real potential for gain by the government.

Interest and principal on mortgages comes into the Fed Reserve balance sheet NOT from new taxes.

Potential for profit exists on sale of properties.

No new government agencies need to be established.

The Fed will hire the necessary personnel to administer the program. Unemployment declines!

The banking system is unclogged and consumer confidence is restored.

Economic recovery can begin.

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