Wednesday, June 23, 2010

Mortgage Workout 4: The real urgency

Its no longer inauguration day. There is no more hope in the air. has not come. HAMP and HARP are failed solutions to the wrong problem. They simply dont work.Forcing a refinancing on a homeowner that consumes 60% or more of disposable income is not a sustainable solution. It is a depressing process without a hopeful ending.

Where is the incentive for that homeowner, often innocent of any wrongdoing and merely a victim of relentlessly reducing home values,to stay in an unaffordable home?

The sensible thing to do is to hand back the keys to the house to whomever can prove they own the note on it and move on to find housing for the family that IS affordable.

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

Everyone must acknowledge that the problem is NOT how to rejigger the current mortgage to somehow cajole the homeowner to pay up. The current mortgage modification practises are structured to encourage the exact opposite result...because that is where the money lies for the banks and mortgage servicers. These guys get fees every step of the way.

Servicers get to charge fees to try and modify a mortgage; they get subsidies from the government to give it a try. The big five banks get to charge interest and just have no incentive to kill the cash cow that borrowing from the Government at effectively zero cost and lending the money right back at a 2+% profit with no risk, has become.

Why should anyone lend to some risky person offering collateral that is declining in value when they can lend the free money right back at a risk free profit?

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

Government cannot abandon its citizens!

This is a moment in history that a simple, transparent process of mortgage normalization could turn into a triumph of affordable prosperity for this great nation and for the world!The United States MUST lead!

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 additional 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 2009 Federal tax return was $125,000 gross before any deductions ( NOT their taxable income, their take home pay with tax added back).

Current US 30 year Treasury Bonds have an interest rate of 4.059%.

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 4.55% (4.059+0.5 servicing fee) for a nominal value of approx $600,000.(arrived at through Discounted Cash Flow 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. The Federal Reserve can resell it if they wish. 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( thats us - the taxpayer). Interest and principal payments 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.

Just imagine the rush of consumer confidence unleashed! Homeowners with new purchasing power!
Banks with capital to lend to credit worthy businesses who can hire new employees who now have an income! Hundreds of thousands of people seperating from the Government Welfare rolls!

This can happen, now. It must happen... anything that has been tried up to now has failed and will lead this nation and the world over the cliff to oblivion.

Change course now!

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