This was something I wrote back in Sept 2008 and sent to my Senator. I’m sure it was one of many, many suggestions. Almost six months later, I still think this is the best solution. It involves a principal write-down in which the taxpayer absorbs 15% – 25%, on average, of the principal reduction. The lender effectively absorbs 60% of the cost. The U.S. taxpayer absorbs the rest. Everyone who played a part in this fiasco, the buyers of the mortgages, the lenders and the lawmakers, pays some price.
For those facing foreclosure who can show that the house is their main residence:
1) If their household income is more than twice the average income in that area, they do not qualify for this program.
2) If the purchase price of the house is more than 50% above the median house price in that area for the past 4 quarters, they do not qualify for this program.
3) They can show that their mortgage payment as a percentage of income is more than the lending criteria. See CRITERIA below. In addition,
4) Their home will be evaluated using current comparative sales in their particular community (EVALUATION).
5) Based on that EVALUATION, a monthly mortage payment (PITI) will be determined for a conventional 30 year fixed loan using a competitive interest rate and including a) any real estate taxes based on that evaluation, and b) an amortized insurance premium equal to 1% of the evaluation and payable to the mortgage holder, and c) an amortized administrative fee equal to 1% of the evaluation paid to a special housing fund to be set up and administered by the US treasury to cover costs associated with the program.
6) The homeowners must be able to meet a more traditional mortgage lending criteria (CRITERIA), either a or b:
a) They can document monthly net income that is 3 times the PITI; or
b) They can document monthly gross income that is 4 times the PITI.
7) (This will be controversial). Anyone taking advantage of this program must pay Federal income tax on the difference (WRITE-DOWN) between the EVALUATION price negotiated and the purchase price less homeowner equity. This tax will be spread out over a consecutive 5 year period. The first 20% of declared income will be declared in the tax year after the closing of the 30 year fixed mortgage contract.
8) The lender can deduct the entire WRITE-DOWN amount in the year in which the contract is altered under this program. The Federal tax savings for the lender would be about 35%. State tax savings would vary.
2 thoughts on “Foreclosures”
My resolution is that, going forward, all home (personal) mortgages be evaluated, administered and held by community banks. Investigation shows that community bank mortgage holdings are so close to 100% viable that the use of “100% viability” is an acceptable descriptor. All the CRITERIA then are developed and imposed by the community bank, with one exception. I propose that all existing, as well as new, mortgages have a 4% fixed rate interest imposed and, unfortunately, those who still cannot afford their homes must then find other affordable lodging. In a limited environment Obama’s plan uses a 2% interest rate and my opinion is that that interest rate’s too low to allow maneuverability in handling existing toxic paper. (I’m assuming here that large banks will have to deal with their own “bad” mortgages and I’m willing to give them some profit margin within which to accomplish that. From a taxpayer perspective I am, however, unwilling to continue to support their internally developed toxicity.) It (limited environment 2%) also creates unhappiness among those who have continuing higher mortgage rates without relief and that unhappiness in today’s economic circumstances is very, very bad. Job loss is a separate problem and in the case of the homeowner’s job loss, in consultation with the bank holding the paper, the I (interest) would be deferred and the PTI would be required as continuing monthly payments for a 6-month period, subject to review. In the event of employment the full PITI payment would resume on the date of the first payment following the employment. Chronic joblessness may result in the loss of the home. Others will certainly have different ideas. B.J.
And homelessness often results in chronic joblessness.>>You are, of course, assuming that community banks will survive and fold or be gobbled up by the biggies as has happened to Tri State, Union Bank and many others in Denver.>>We also need to take a hard look at out national monetary policy, which has been the cause of much of the trouble — as those looking to reap profits create exotic financial instruments like credit default swaps. Lydia