Tuesday, January 20, 2009

Mortgage Workout 4: The real urgency

Its inauguration day. There is hope in the air. Change....

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 willb be lost forever.

They must do this for the benefit of the country. To do anything other than a clean fix aimed laserlike 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, without using Bailout money, without cramping the style of politicians who want to free up money for stimulating economic activity and would restore the great hope of prosperity for this great nation and the world:


John Smith Family owns a house with a current mortgage of $700,000. It is their primary residence (they live in it).
Smith household income reported on 2007 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 3.125%.

Principle no 1: 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.

Smith gets a new mortgage under this program with a 30 year term at 3.625% (3.125+0.5) for a nominal value of approx $600,000.(arrived at through DCF analysis based on what Smith can afford to pay). 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

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 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.

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 can resell it or if they wish sell it to FNMA in the regular course of business. Smith has lived with a new lower payment and still got the tax deduction for interest. He 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 on mortgages comes into the Fed Reserve balance sheet. 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.

The banking system is unclogged and consumer confidence is restored.

1 comment:

  1. It's simple. It's elegant. And regular folks can understand it, so it's transparent.