(Note: This post was going to be twice as long, but due to the wonder of the internet/computers – specifically a Squid upgrade on the NetBSD firewall – half of my thoughts were not saved, as I have time and remember, I will follow up on this post)
Nobody has asked me, but here are a couple of thoughts on fixing the housing mess.
First, lock the adjustable rates at 5%. Not for second homes or speculative properties – honest to goodness first homes. We can’t put in a provision that says you have to be behind and in danger of foreclosure, we know these loans are bad; we know that most people were suckered into the low rate that jacked up after a year or two. Lock the rate.
Second, if the government can spend all kinds of money on banks without strings it certainly can work with the home owners. Loans that are in danger where people were encouraged to buy above their means can be modified in the following way: subsidize those homeowners that are in trouble. $1000.00 a month for say a maximum of four years – that’s $4800.00 per household that is in trouble. Tack the $4800 onto the back end of the loan as a form of tax lien, collect no interest on it but get the payoff when the home is eventually sold. This way households that are worried about their next paycheck can get some relief even if their job is unsteady. And the same homeowners would need to attend some kind of credit counseling and budget management program so they don’t slide back into trouble once the helping hand is no longer extended.
$1000.00 month limit would mean that overpriced homes aren’t included and that households would still need to come up with some cash on a monthly basis. Obviously, the banks aren’t increasing lending so they should not be getting additional money unless those funds are directly assisting home owners.
I read something a couple of days ago that suggested that the mark-to-market rule be suspended for banks. Mark-to-market means that accounting adjustments must be constantly made based upon what a bank thinks they can sell their loans for. For instance, a $100,000.00 mortgage might only be worth $90,000.00 (to the bank) since that’s what they could get for selling it to the next bank. But a foreclosed home is only about half the original mortgage value. A $100,000.00 mortgage is only worth $50,000.00 and – if you follow the line of thinking of “strict” mark-to-market rules – every other home in that area becomes worth half of the original mortgage. That’s a huge paper loss.