My idea is to help homeowners and financial institutions deal with the crisis. In turn, it is going to help the government avoid huge taxpayer money losses, restore investor confidence and help communities across the US.
I believe the primary means of stemming the crisis is rate reduction (which is a form of loan modification). However, it has to be drastic enough and across the board to make an impact. This is by no means an overnight solution, but rather a long term approach to a problem that took years to develop in the first place.
Who qualifies? No one class of persons is exempt from the crisis, so we should not choose who deserves more help. I believe that any individual/s who owns a primary residence, vacation or second home, and investment property up to 3 homes should be able to take advantage of this program.
The way to do this is to initially assess the current value of the loan. We now need to convert any adjustable mortgages into a fixed loan, 10-year interest only 30-yr fixed amortized (total 40 years) to keep it simple. We now subtract the total loan amount by the assessed value. The individual will pay the regular rate on this first portion of the loan. Any amount over the assessed value will have the rates reduced between 3%-4%. This will result in a much lower payment for the "negative value". This will preserve the individual's credit and give them an incentive to not walk away from this loan. The government's role would be to act as intermediary between the investor (who bought the loan) and the loan servicer. Some kind of law would have to be enacted regarding the non-tax-deductibility of losses from mortgage loans to encourage investors to agree to this program. The government will also act as an insurer reimbursing loan servicers from some losses if the market does not fully recover in 10 years.
Of course there is no such thing as a free lunch. This rate reduction will accrue interest on the back end. Now after 5 years, so that is between years 6 and 10, the lender will have the option to tack on all that accrued interest back into the principal amount of the loan. Hopefully in 5 years time, the market would have recovered and real estate values have appreciated at a decent rate almost equal to or greater than the loan amounts combined. However, if the market value of the home does not reach the total loan value, the lender has an option to forgive the debt portion and ask the government for reimbursement. This forgiven debt is considered income to the individual. They would have to pay taxes on this amount unless they can prove hardship.
What this program is intended to do is to prevent people who can afford to pay their loans from walking away and tarnishing their credit now in the hope of acquiring another piece of real estate in the future at a cheaper price. It would also prevent banks from having to foreclose on homes and adding to the glut of home supply. It would also give investors an incentive to keep investing in this type of investment vehicle because their interests are also protected. Local and state governments will keep functioning because taxes will have to be paid as well. This program should hopefully stabilize the value of real estate which since going through this major correction now appears to be a bargain. If some sort of program like this is enforced, Congress will need to legislate something that would tighten the leash on individuals walking away from their current loans after buying a cheaper property, and fine and/or imprison persons who are proven to be taking part in fraudulent transactions.
No comments:
Post a Comment