An Alternative Housing Rescue Plan That Doesn't Cost A Dime

Pamela and Paul,

Thanks for reading through my insanely long post. I really do appreciate the time you two have given out of your day to deal with my insanity.

If you two have time, scroll down and read one of my latest replies to Bill S and look at the numbers that I lay out for the program. I really think that if this was done right, it could be completed without any long term cost to the taxpayers.

Paul,

I address the issue of the upcoming foreclosures some in the reply to Bill S. I honestly don't think there will be anything that will prevent at least ahalf of those foreclosures. If people don't have jobs to pay for a mortgage, or they aren't willing to pay for a house that is worth half of what they owe, especially when their neighbor just bought the exact same house at half the price, then they are going to walk.

I don't think there is realistically anything that can be done about those.

Those people that are willing to tough it out and stay in the home for 10 to 15 years and allow their house to appreciate in value will have a chance of being saved though.

Thank you for the kind words Roy. It really helps a lot to have people read through my insanity and try and help me figure out where I might have went wrong.

Btw, I accepted your friend request!

Bill,

In a way, I agree that the government forcing the refi's is socialization. But this is really the only way I could think of that could possibly halt the impending foreclosures and mortgage crisis that is still to come. I know a lot of people think we should let it happen to reset the system, but there are also millions of people that don't want to see the economy continue to crash and the rest of the dominos fall.

I think you misread my steps on the Re-appraisals. The government would buy the note at the current value. This means the bank doesn't lose anything. It would be no different from any current homeowner paying off their mortgage in 1 fell swoop. Now, if somehow the bank is able to use the projected interest that will be earned over the next 30 years as an asset on their books. Then yes, they would lose that. But are they even allowed to do that? I would think that would be illegal and unethical.

The re-appraisal would happen after the bank already has their money. Once the house is re-appraised, any remaining underwater debt would be forced onto the person's personal debt. That would be their punishment as well as foreclosure people having their credit frozen until that debt is paid in full. They would be able to sell the home at the actual value if they still didn't want to pay a mortgage payment instead of being forced to walk away causing the home to be foreclosed upon and causing the neighboring properties to suffer being devalued.

Perhaps this could be a 1 time only kind of thing where you get this 1 get out of jail free card. If you sell your home after the refinance, you are back to square 1 in the housing game. You would have to buy a house based on your credit score and income and would have a normal interest rate. This would solve the problem of keeping people from running back to the government over and over.

Bill S,

I have a couple of points I would like to respond to.

You said, The banks won't, but the tax payer will, regardless if it's a loan or not. 40% of all refi's default.

The only people that would quallify would be people with certified income and then the mortgage would be set at a rate they could actually afford. I think the reason for a lot of defaults is that the banks continue to unrealistically refinance people into mortgages that have far too high of % rates and monthly payments. I know this was true for my dad. He had to refi a few months ago through a government assisted refi and actually ended up with a higher interest rate. The only thing the government did was transfer his late payments to the end of his mortgage, cancel out the penalty fees, and tack on 6 more months of payments to the end of his 30 years. Luckily for him, while his foreclosure was put on hold, he was able to get back on his feet, get some medical bills paid off and get his life together.

You said, until they file for bankruptcy, sticking taxpayers with the bill.

I know that there are certain types of debt nowadays that cannot be wiped out even with bankruptcy. Perhaps the personal debt from my plan can be put on as a permanent debt like that. I'm not sure of the process of bankruptcy as I have never had a need to look at it.

You expressed distaste with the President's plan because it is only benefitting Freddie and Fannie, and even then very few people qualify. I wholeheartedly agree. The President's plan is a joke. It screws the other 50% of Americans who aren't financed through Fred and Fannie. Like you said though, its his plan and we both know it is going to be passed as well as more housing bailouts to come.

I am just trying to devise a plan that might actually have a chance of working and benefitting all Americans, not just the majority of lower income financed mortgages based through Freddie and Fannie.

I am also trying to devise a plan that is budget neutral, where the up front costs are realistically paid back by the end of the plan. Not a Stimulus bill joke.

Lets say that of the 9 million projected foreclosures coming, 1/3 of these have jobs and can afford my refinance. After selling that note back to the bank, that would generate 12 billion dollars.

Now, lets say that of the remaining 66 million people (I got this number from a few sites that said 75 million people had mortgages - the 9 million in upcoming foreclosures), 70% still owe money on their homes. According to the census burea for 2007, around 30% of people owned their homes free and clear, so that leaves roughly 46,000,000 people with mortgages. Lets be conservative and say 20% of these are underwater or would be interested in the refinance. I honestly believe it would be higher than 20% but I'll go with that for now. That lease 9.2 million refi'd and the bank notes purchased would generate 46 billion dollars.

Now, lets take those 30% that own their homes. That leaves 20 million people that might qualify for the consumer loan. Lets say 20% of those are employed and choose to take it out. That means 4 million consumer loan notes will be purchase for a total of 3.6 billion dollars.

So, with my plan, their is a total of 61.6 billion dollars generated from the sale of the bank notes. So, we have 12.2 million refi's done at a cost of $4,752 per refi and 4 million new 30,000 dollar consumer loans that will stimulate the economy for a cost of $900 dollars each. I seriously don't think it will cost $4,752 for each refi and debt account and $900 to create each consumer account. My dad was able to refi and at the end of all his closing costs, he ended up paying around $3000. So, if you take the remaining $1,752 of profit left on the refi's and figure out around $752 for creating the debt account, that leaves $1000 dollars profit from each of the 12.2 million refi's.

So, to make a long story short, my plan has the potential to make 12.2 billion dollars that can be used to pay back the costs of setting up the program.

The intial payoff on the mortgage will have to be bankrolled by the government, BUT, the actual reappraised value of the mortgage will be purchased back by the banks paying most of this value back, and the remaining underwater debt will be transferred to the homeowner's personal account.

This plan has the potential of being at the worst budget neutral, but at the best could even turn a profit for the governement.

Bill H,

I totally agree with you that the market has not finished crashing. If you look at the chart in my article, it shows that there still needs to be a 20% drop of current market value just to reach the appropriate levels where we should be.

That chart DOES NOT factor in all the insane new home construction that was going on over the last 5 years and all of the vacant housing that is sitting and collecting dust. The problem with all of these constructions and homes is that the bank, investors, and construction companies have way too much money tied up in the properties and are trying to find some way of recouping their losses without having to write the differences in value from when they built/bought it to the current market off without having to take the financial hit.

Personally, I think that is the way of business. You take risks, you lose out.

I know you guys feel the same way about the housing situation for a lot of people that bought homes they couldnt afford or didn't understand arms, and for the most part so do I as long as they weren't victims of predatory lenders, but I am trying to devise a plan that can also save those out there who were just unfortunate to lose their jobs due to the downturn of the economy or other reasonable financial constraints.

Bill H,

I understand your point about helping people that should never have taken out the loan in the first place. My point is, do we really want another 3 to 5 million more homes dumped on an already breaking market when they could possibly be saved? Sure, those people that bought 500,000 dollar homes on a 50,000 dollar salary should never have been there, but can we really afford to have those 500,000 dollar homes foreclosed upon and have the bank unwilling to sell them for their actual value of 350,000? Those homes are just going to stagnate the market even more.

At least with my plan, the house can be sold after the refi is done at an actual value that someone is willing to pay, instead of the bank sitting on the property and letting it rot after foreclosure hoping the government (meaning us) will buy it up.

The bad homeowner will still be stuck with the excess underwater debt on a personal level that he will not be able to get rid of. His credit will be frozen until he pays it off. Most of these people are living off of credit anyways. This will force them to learn to pay for the things they buy up front, save and be responsible. Is that not punishment enough?

And as far as those numbers from the Treasury's program, I'm not sure what you mean by leaving out the "little guy".

Are you saying the Treasury's plan is allowing people with too expensive of houses to refinance? Or are you saying the opposite and that under the Treasury's plan, the little guy is being covered since he won't own a home that is above those limits?

I guess my response either way would be that my plan is designed so that all homeowners have access to the same plan and ability to refinance as well as a bonus for the people who already own their homes. In the Treasury's plan, people that own property worth more than the limits, people whose payment is less than 38% of their DTI(there are millions of Americans like this), and people who already own their homes get nothing out of it.

Those people get to pay the extra taxes and funding of the Treasury program but see no tangible benefit from it. Sure, if estimates are correct, 400,000 of the 9 million potential foreclosures might be staved off and that might save those people's property values some if one of those foreclosures is in their neighborhood, but big whoop.

My plan has the potential to save 3.6 million foreclosures and throws in a thank you to current homeowners and people making their payments responsibly at potentially no cost to the government. My plan also has the potential of boosting the economy by increasing consumer spending based on the Current on Payment crowd having more money to spend after their mortgage payment is lowered and the Paid In Full crowd having 30,000 dollars each to spend on consumables.

Bill H,

Agreed on the rigging of the bill for Fannie and Freddie. That's one of the reasons I don't like it.

I guess the differences in our views is that I would rather perform a reset on the system right now than to continue to let the market crash. You want to let those that shouldn't have owned a home learn about the moral hazard the hard way, but that is indrectly also going to punish those of us who have been responsible.

I don't want my property value declining 20% because 3 of my neighbors have foreclosed. I don't want those houses bought up as section 8 because the bank can't find a buyer for their asking price.

And as far as ARMS go, I guess for me, ARMS are just too risky of an investment. I look at buying a home as making it where you heart is. A place to raise a family and have stability. The thought of buying a house with a low indroductory rate of say 2% based off of an ARM because I can't afford the house at the normal interest rate is insane. There is no way that I could go in with the thought of...Ok, I will do this now, but I will get my credit in order and get my life together before the ARM resets. This has been what happened to many current borrowers and bit them in the ass.

I guess in my view, most people are stupid. If you allow them to do stupid things, they will. The problem now is that most of those stupid peoples decisions are having a serious repercussion on the rest of us. To me, ARMS are part of that stupidity.

Thanks AmusedinVa,

I spent a couple weeks trying to develop a plan in my head that would benefit everyone instead of just those that have fallen on economic hardships.

I know, for me personally, I am not looking forward to the increased taxes that are coming from all of this while I am trying my best to pay my own mortgage.