Solving America’s Mortgage Crisis – A Simple Plan

Our nation is facing the biggest housing crisis in recent history, and the consequences are affecting our entire economy. There is much debate today surrounding the government’s $700 billion financial rescue package and what steps need to be taken to stop the bleeding and renew stability in our real estate and financial markets.

Plans on the table so far involve pumping cash into banks, buying bad loans and possibly suspending foreclosures. These strategies are what I call “quick fixes” or Band-Aids that have little chance of correcting the root problem. Buying bad loans from banks puts the government in the position of having to dispose of a potentially endless supply of bad loans. loans and real estate. A moratorium on foreclosures simply postpones the problem. A growing belief that home loans are subprime will deter lending, allow real estate inventories to grow, and push real estate values ​​even lower.

In this article, I propose a simple yet powerful solution to this crisis that provides an opportunity to reverse the downward spiral and create sustainable stability in our housing markets. But first…

how did we get here

Tens of years ago, the only mortgage available to the American homebuyer was a 15- or 30-year fixed-rate mortgage. If the underwriting was successful, the borrower knew what their monthly mortgage payment would be for the next 30 years. The simple formula used to decide what size loan a borrower could afford was based on a specific debt-to-income ratio. If this formula were applied correctly, the borrower would not be able to purchase a property that would be beyond his financial means. From a credit perspective, the risk was isolated to personal breaks in income, such as illness, unemployment, death, etc.

The current problem is a consequence of creative lending practices designed to enable more people to purchase high-end homes and leverage the equity in their existing homes to live a lifestyle beyond their means. No one can argue against pursuing the “American dream” of home ownership. But this dream has now turned into a nightmare because the whole system has abused these creative mortgages, fueled by greed.

The formula for disaster was to combine moneylenders, mortgage brokers, realtors, and builders, all motivated by profit, with buyers who wanted a better lifestyle, whether they could afford it or not. Although these motivations are not necessarily destructive on their own, when combined with risky mortgages that were issued based on general overconfidence in a rising housing market and against previous industry fundamentals, it was a recipe for disaster.

Option ARMS, 80/10/10 ARMS, two-year teaser rates, HELOCS, negative amortization loans and other products allowed people to qualify for mortgages that were up to four times the amount they would have previously been allowed to borrow. The supposed safety net was the assumption that real estate would continue to appreciate in value, allowing the borrower to refinance the loan before the unaffordable rate adjustment began. Mortgage brokers further complicated the problem by refinancing existing adjustable loans at new two-year teaser rates (delaying the problem for two more years) and allowing borrowers to get a cash refund for general living purposes. As long as real estate values ​​continued to rise, the music would never stop and there would be no mortgage crisis.

Now, with borrowers in homes they can’t afford, foreclosures flood the markets, lending has ground to a halt, the real estate market is flush with inventory, and prices are down. Qualified buyers are reluctant to buy because credit is tight and no one is sure if the market has bottomed out. Prospective homebuyers are holding back, waiting for a sign of a market turnaround, which only extends the cycle to the downside.

Before we see a market recovery, home values ​​will have to bottom out and start to stabilize and rise. In the meantime, inventory must be reduced and consumed; delinquent borrowers should be saved when possible; And to avoid resentment for using taxpayer money to bail out irresponsible lenders and mortgage holders, borrowers who are current on their mortgages should be rewarded. A Band-Aid approach will make the problem worse. We need a solution.

“The Simple Plan”

I call my plan “The Simple Plan.” Creates a one-time 4.5% fixed rate 30-year home loan insured by the US government for all US citizens age 18 and older using a 90% loan-to-value ratio and strict underwriting guidelines related to income and expenses.

Everyone must be underwritten and approved for this new loan. The time allowed to take advantage of this program would be 6 months for existing owners and 12 months for new buyers.

I. Existing Delinquent Borrowers

Under “The Simple Plan,” lenders would make an exception to the 90% loan-to-value ratio and if borrowers can pay off the entire debt at the new rate, they can put their past due amounts on the back of their new loan and remain in their home. If they still can’t pay the debt, the loan servicer would be incentivized to agree to a short sale (possibly to the existing borrower). If the borrower is unwilling or unable to reach an agreement with the servicer, foreclosure would be appropriate.

EXAMPLE 1:
Loan amount: $150,000
House value: $120,000
At an interest rate of 13%, the monthly payment is $1,659.
At an interest rate of 11%, the monthly payment is $1,428.
At an interest rate of 9%, the monthly payment is $1,207.
At an interest rate of 7%, the monthly payment is $998.
At an interest rate of 4.5%, the monthly payment is $760.

EXAMPLE 2:
Loan amount: $200,000
House value: $150,000
At an interest rate of 13%, the monthly payment is $2,212.
At an interest rate of 11%, the monthly payment is $1,905.
At an interest rate of 9%, the monthly payment is $1,609.
At an interest rate of 7%, the monthly payment is $1,331.
At an interest rate of 4.5%, the monthly payment is $1,013.

The examples above illustrate projected payments at various percentage rates. In both examples, the loan amount is greater than the value of the home, as is often the case today. Borrowers will typically work to modify a loan by putting late payments and fees at the end of the loan and giving it a fresh start.

For borrowers who do not qualify for full debt but can make payments on a smaller note, the servicer should be encouraged to modify the Unpaid Balance (UPB) to a number the borrower can afford. If the administrator does not want to modify the UPB, the house would be foreclosed and the administrator would assume the responsibility of reselling the house at a significantly lower value. Such a scenario would allow many people to remain in their homes and hasten the inevitable demise of unsalvageable loans.

II. Existing Current Borrowers

Under “The Simple Plan,” lenders would give non-defaulting homeowners the opportunity to opt out of higher-rate ARMs and mortgages. Homeowners would have the opportunity to refinance their existing loans at a fixed rate of 4.5%. The 90% loan requirement would be waived. Owners of the current loan can modify the loan (100%) of the debt to a 4.5% 30-year fixed rate or the borrower can obtain a new loan from another bank at a 4.5% 30-year fixed rate and the loans Previous discounts would be paid at 75% of the 1st and 50% of the second. The added security of a stronger loan and collateral makes it easier for banks and investors to handle fixed-rate loans. Borrowers would also have the option to find a new lender under these terms.

third party new borrowers

Under “The Simple Plan,” first-time borrowers as well as investors buying rental properties and second homes would be motivated to step aside and start buying homes now. When this happens, the inventory would decrease and the recovery would begin.

New borrowers would be backed by a 10% down payment, a current and accurate appraisal, and an adequate debt-to-income ratio.

At first glance, it seems that “The Simple Plan” would significantly reduce the banks’ monthly income. However, if home values ​​continue to fall and loans are not recovered, most current loans at higher interest rates will end up in default and the downward cycle will continue for the foreseeable future. This plan will allow banks to do more volume and generate substantial income while stability is restored to the real estate market.

Under any other plan, banks can get a higher interest rate for now, but the net results will be much worse and the recovery will take years.

“The Simple Plan” is relatively easy to execute and would stimulate the real estate and mortgage markets, revitalize communities, and provide sustainable stability that benefits everyone.

© 2008 All rights reserved by John C. Begins