Don't you hate it when someone pulls out a calculator and points out how wingnuts are full of it? Well here i've got another steaming pile of math for them. This time, it has to do with fixing the foreclosure mess.
All of this 'bad bank' talk, buying up bad assets, and various other euphemisms for the government becoming a glorified financial garbage collector sicken me. There's a better way to do it. It gets people out of their subprime loans, assigns value to 'toxic assets', and stems the forclosure rate.
Come with me to the back of the envelope in there's moreville. (presented in convenient cut-and-paste format for your congressional reps and senators)
Dear <>
With all of this talk about using my tax dollars to crate a toxic-waste-dump of financial securities, I'd like to exhort you to consider another, more elegant, and better thought out option.
It involves using two entities that the federal government already has, backing those assets with a powerful element of the economy that has so far been untapped to deal with the financial crisis.
What is this miracle cure for the foreclosure crisis? The cure is nothing more than our own empowered citizens. Here's how we do it:
- Ban prepayment penalties on primary-residence mortgages. Pre-payment penalty traps are a tool used primarily by predatory lenders; they have been banned in many states, and should be illegal nationwide.
- Offer loans to homeowners with the following terms: Long amortization (30, 40, or even 50 years), low, fixed interest rate (3-4% or so)), and a one-time fee of 3 or 4% of the principal value of the loan. The loan is based on monthly payment ability, rather than on house value.
- Adjust bankruptcy law to make it harder for these 'escape hatch' loans to come off an individual's balance sheet.
- Treat lease agreements as binding attributes on a property that, just like liens on a property, are bought and sold with said property.
This weeds out and helps those homeowners who deserve help the most but avoids giving a handout to 'predatory borrowers'. It relies on every American's innate desire to have a place to live, and to avoid the humiliating experience of foreclosure Here's why:
Numbers 1, 2, and 3 create an 'escape hatch' for borrowers trapped in predatory, adjustable rate loans by offering a long-term, low interest loan. Since borrowers must be able to make the monthly payments on the loan, there is less concern about using the value of a house to back the loan. This plays on the fundamental principle that most Americans want a place to live, the underlying value of the home notwithstanding.
'Predatory Borrowers', on the other hand, will be deterred by three key things. First, if they are unable to make the monthly payments with a reasonable credit risk to the government, the loan will be denied. Second, predatory borrowers, motivated by greed, will not want to absorb adding 4% to the principal of their loans. Third, by making it harder to walk away from a loan, the mythical 'predatory borrowers' that walk away from houses when they are no longer appreciating in value will avoid this escape hatch.
The final item, #4, protects renters whose landlords go into default, through no fault of their own.
How does this help the underlying housing crisis?
There were 233,000 foreclosures in the US in January, up more than 50% from last year. If we assume (for lack of good data) that 25% of those foreclosures are due to ARM-resets and other predatory-lending issues, the number of preventable foreclosures is about 60,000 a month. At an average loan value of 250,000 dollars, a mere 15 billion dollars per month would solve that problem until the market turns around and the program can be ended. This comes out to 180 Billion per year of dual-impact money.
How does this help the broader financial crisis?
For ever government loan made, a part of a bundled security package is resolved with a finite 'payoff' value. It doesn't matter who owns those securities; it takes advantage of the fundamental right of every borrower to pay off their loan. No terms need be modified, and there is no bundling complexity; it simply works.
This is money that is injected directly into banks to resolve the value of their bad assets; more accurately put, every dollar used to refinance these loans helps an average American AND is equivalent in effect to the government buying those bad assets at some fixed value.
This dual-impact money is far more valuable to everyday Americans than simply buying up troubled assets and having our tax dollars used as barrels to store financial toxic waste.
Since banks will have to compete with the government for refinance business, there will be an incentive to resume lending or lose out on a number of lucrative loans. This may also turn into an incentive to create lender programs to do this as well.
Finally, those 4% fees go directly to prop up Fannie Mae, stabilizing her revenue stream and allowing the government to keep those loans off the Fed's balance sheet.
I humbly exhort you to sign your name onto a simple piece of legislation accomplishing these four things to help average Americans. I am sure, also, that any voter in your district whose house you save through this program will become a lifelong supporter of yours. Do not discount the valuable political benefits of saving people's homes.
Sincerely,
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