Housing Reform Benefits

So, what benefits should be we see as a result of my proposal?
1) The residential real estate market should immediately stabalize. Homes would become much more affordable. My understanding is that there are still many Alt-A loans with payments due to increase dramatically. As that happens, more people will be walking away from their homes meaning more empty homes on the market and more bad paper out in the investment world. I'm not saying my proposal will save everyone who still has an ARM due to reset, but it will do more than anything that has been put in place so far. As proposed in my last blog, very low interest rates could be used to save as many loans due-to-go-bad as possible and to make the existing market more affordable for lower income people. A six month window could be used as an incentive to get people back into the market. As the existing inventory declines and the economy improves, interest rates could be adjusted so that the market doesn't overheat.
2) With lower 30-year fixed-rate loans available, people with lower incomes will be able to afford homes. People will see the value of home ownership as inventory declines and prices begin to rise again. People considering walking away from their homes now could take advantage of the program and reverse the trend of falling real estate values.
3) Millions of homeowners who can convert to lower interest rate loans could save hundreds of dollars month after month. THIS is the bailout which will help get the middle class out of debt and ultimately provide the stimulus which will create jobs.
4) The same homeowners who save hundreds of dollars monthly due to lower interest rates will also have lower home interest deductions on their 1040 schedule A's. Tax revenues will therefore increase at a time when they are desperately needed, WITHOUT raising tax rates. The ulimate win-win situation.
5) As the economy picks up, so do revenues at all levels of government. Hate to think of what will happen if this recession lasts much longer.

The Basic Idea

My proposal is to allow any person over 18 years of age to be able to purchase one home (or convert one existing home loan) to a 30 year fixed mortgage according to the following outline:

The applicant goes to the lending institution of choice and applies for the loan. The lending institution does the appropriate analysis of the applicant's financials and determines whether or not they qualify. If so, the lending institution goes to Fannie Mae or Freddie Mac with copies of the qualifying documents and secures the amount of the loan necessary to purchase the home. (It might be prudent to require at least 10% down so that the buyer has a vested interest in the property.) The lending institution borrows the money at 3% fixed for thirty years, and charges the applicant 4% fixed over the same period. For those with existing loans, so long as they are current on their existing loan, their lender can take proof of being non delinquent and convert the loan to the 4% fixed rate. For delinquent existing loans, the lending institution would have to look at the borrower's financials to determine whether or not they would qualify for the new loan. (The interest rates proposed in the outline were chosen as examples. Whereas I consider them to be reasonable, the lending institutions might argue that they need a float larger than 1%. Also, if the administration was really serious about getting the economy back on track, it might open a six month window where the interest rates would be 1% and 2% respectively as incentives for purchasing existing inventory and/or loans already gone bad.) Loans would be tracked by social security # so that no one could have more than one at a time. We don't want to re-create the bubble that just burst. The plan is intended for home owners, not home flippers. Unless the applicant can establish that they had to relocate [e.g. due to work], we might want to restrict people to a 1-2 year waitng period between loans.

Killing Two Birds With One Stone

So, the two problems we have to solve are 1)bad home loans & 2)personal debt. My first thoughts on the matter were: assuming the subprime borrowers could afford the early teaser rates they were given, the solution would be to convert their loans to 30 year fixed loans at those rates so that they could afford to keep their homes. At this time, of course, lenders aren't able do that with interest rates subject to the fluctuations brought about by fiat currancies. However, what if lenders could borrow money from the government AT A FIXED RATE FOR 30 YEARS. They could then turn around and lend it out for 30 years (at a fixed rate) and not be victimzed by an increase in interest rates. Now we have an effective way to deal with a lot of those bad loans out there (and most of those loans still to go bad). How does this help out with the personal debt? Instead of the administration's complicated and lame attempt at bailing out a narrow segment of homeowners with problem loans, don't discriminate; make the program available to EVERY homeowner AND potential homeowner out there. If every homeowner could convert their, say 6% loan, to a 4% loan, they would be saving hundreds of dollars a month in interest payments. The savings could be used to pay down their credit card debt to the point where the could afford to become consumers again. UNDERSTAND THIS: it is people with money AND the desire to spend it that creates jobs and moves the economy. Lowering interest rates for homeowners will put some significant money in middle class hands WITHOUT the government GIVING anyone anything. If anything, it will shore up government coffers at a critical time in our country's history. More to follow.

The Problems

1/7/2010

A few of my sources started warning about the impending housing bubble in late 2007, warning their readers that banks and other lending institutions would be in serious trouble when it burst. Then in the late spring of 2008 one of them went on to say that the problem was more serious than the housing bubble. Middle Class America, it warned, was up to its eyeballs in debt, and we should be prepared for a major market correction, recession, and/or worse. The engineering schooling I'd had kicked in after reading that, and I began to think if there were any ways of dealing with the collapsing housing market and all of the private debt. It was clear that Bush's little $600- stimulus payment wouldn't get the job done, not to mention that it would only increase the national debt due to little of it coming back to the government in the form of tax revenue.

Where I'm Coming From

1/6/2010

I do my own investing, so I subscribe to several e-letters so that I can get a lot of perspectives on what is going down on the economic front. I don't claim to be an 'expert' on the issues which will follow. I've never had a class on economics at the college level. What I'm proposing will be based on a logical evaluation of the problems our economy is facing. If you wish to take issue with the problems, I'll reference the 'experts' from my e-letters. Let's get to it.

Why I'm blogging.

1/6/2010

Well, I have to kick this off somehow, so here goes. The purpose of this blog is to share ideas with my fellow citizens so that they can judge for themselves just how competent our elected leaders are. Until a couple of years ago, it didn't appear to be necessary. Despite their selling our progeny down down the river since Kennedy was assassinated, I was beginning to think that I wouldn't see the fruits of their labor in my lifetime, or at least until it was just about to end. But now, with our current recession soon to become a prolonged depression (and a Weimer Republic inflation around the corner), I feel it my duty to let everyone know that there is a very simple thing that could be done to turn our economy around now; hopefully, before it is too late. So I'll try and put down my stream of consciousness on a daily basis until the work is complete. If you agree with what follows, please email the contents or the URL to as many people as possible. The voting public is the ONLY way that the ship will be righted, despite our current leader's hollow campaign claim to be the candidate of change. If you disagree, I welcome any and all constructive criticism, and look forward to debating it as it is received.