Wednesday, January 13, 2010

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.

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