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.