Plan creates a federal fund regulated by responsible entity to look at each case where a homeowner is facing foreclosure due to their inability to pay an upwardly adjusted monthly mortgage payment.
FOR IMMEDIATE RELEASE / PRURGENT
Background:
The U.S. President, his Treasury Secretary, Federal Reserve Appointee, and most of the purported “experts on the economy”, are claiming that the U.S. is facing a prolonged economic recession due to the illiquidity of a significant portion of the assets owned by the conglomeration of huge Wall Street lenders and mortgage brokers.
The assertion that has been progressively pushed before the American citizenry is that hundreds of thousands of people who bought adjustable rate mortgages, have found themselves unable to pay their mortgage notes when the mortgage payments escalated. With adjusted mortgages escalating often by double the prior payment rate, as many as 4 million mortgagees were facing foreclosure. With so many houses going into foreclosure there was a radically reduced demand for new houses, and tremendous downward pressure on the prices that could be charged for purchasing existing houses. The collection of deregulated entities, now able to engage in mortgage loans, built revenue generating portfolios on the basis of an expanding base of closing fees, sales commissions and interest payments on these mortgage loans that now will not generate those revenues.
Most policy makers in Washington are asserting that the problem results from irresponsible borrowers, and loosely developed mortgage loans, that resulted in too many over valued houses on the market and too many bad mortgage loans in these companies’ portfolios. Without the anticipated revenues coming in from these failing mortgage loans, and the declining sale prices for the mortgaged homes, the collection of American lending companies had far less money or asset leverage from which to make regular commercial, homeowner and student loans. The declining liquidity of these institutions radically reduced the availability of credit to fund the cyclical needs of many types of businesses who use short term credit to cover their cash flow needs until their cyclical revenues come in. Further, many of these companies borrowed monies at low prime interest rates from the Federal Reserve, and possibly sources whose monies came from international lending sources, and loaned those monies at higher interest rates to home buyers. With the radical increase in mortgage foreclosures, the underlying value of the homes being financed began to significantly decrease, requiring lenders to reduce lending so that they had enough assets to cover their liabilities. Since billions of those dollars leveraged to underwrite these poorly structured loans came from international sources, the effect of this credit crisis affecting the American housing and credit market is being felt by other nations around the world.
If the President and these “economic advisors” are telling something approximating the truth, then the core of the problem is the money that is tied up in houses that have been foreclosed on and can’t be resold for enough to cover the remaining principal lent to those mortgagees, and the lost anticipated revenues from those home sales and the interest that would have been paid on those mortgages. In other words, if the vast majority of homeowners holding mortgages were able to continue paying their mortgages, there would be no lending crisis.
Thus, instead of designing a bail-out that does not address that sourcing problem, why not develop an intervention that actually does.
Proposal: The Enhanced Down Payment Program
Create a federal fund regulated by some responsible entity to look at each case where a homeowner is facing foreclosure due to their inability to pay an upwardly adjusted monthly mortgage payment.
Develop homeowner mortgage intervention criteria on the basis of which this entity would put no-interest money into the homeowner’s mortgage as though it had been a part of the original down payment. Pay that money to the mortgage lender just as would have been done if the homeowner had made the down payment. Structure the amount to provide in an enhanced mortgage down payment around what it would take to keep the mortgage payments reasonably within the range the homeowner had been paying before the mortgage payment was adjusted up. The federal government would have a first lien on the home in the amount of the enhanced down payment that would have been provided through this initiative. If the home is sold, inherited, foreclosed upon or in some other way disposed, the federal government would have first lien up to the amount of the enhanced down payment.
The enhanced down payment would be paid back to the federal government as the homeowner made her or his mortgage payment. If the enhanced down payment represented 30% of the purchase price of the home, 30% of the principal payment included in each mortgage payment would go back to the federal entity created to manage this program. If the homeowner paid off the mortgage, the federal no-interest loan would have been paid off at the same time. Since the amount lent by the federal government through this program would have a declining balance each time a mortgage payment is made, every year the taxpayers’ exposure would decrease. If the homeowner filed bankruptcy, the federal government would have a prior lien on any assets the homeowner has, and would retain that lien until the federal enhanced down payment had been returned.
Monitoring
Monitoring the return of the federal enhanced down payments would be simplified. The entity created to provide and monitor the return of federal funds would audit all payments and return of the federal interest as it would were it a bank lending institution. All enhanced down payments would become parts of a no-interest loan portfolio with payment schedules identical to the schedule of the original mortgage lender for that mortgage. The federal entity would have to be notified immediately if the homeowner falls more than 30 days behind in her or his payments. Normal foreclosure procedures would apply, except that the federal government would hold a lien prior to that of the original mortgage lender.
Benefits
There will still be mortgage casualties under this proposal. However, they will be no more frequent than the casualty rate historically incurred on mortgage loans.
Since the assertion has been that the credit crisis is a result of homeowners’ inability to pay the adjusted mortgage monthly payment rates, this proposal will erase that cause.
Since the lending institutions have no right to expect anything more than being paid back over the mortgage term for the mortgages they provided, the cash flows and asset structure of the lenders will have been restored as if this purported “sub-prime loan crisis” had never occurred.
If those who say that there is a true crisis are telling the truth, this proposal will provide a correction that:
a. keeps new homeowners in their homes,
b. keeps neighborhoods from being dragged down due to a plethora of abandoned homes
c. forces the lending institutions to incur the normal risks they would have incurred under normal lending structures
d. places the level of liquidity into the lending system that would have been there had this purported crisis not occurred.
e. limits the liability to be shouldered by the community of American tax payers
f. provides a fairly safe route for the restoration to the taxpayers of any funds used to finance the enhanced down payments
Cost
If there are as many as 4 million homeowners facing foreclosure due to this purported sub-prime mortgage crisis, causing a purported credit crisis, and the federal government provided an average of $40,000 per affected homeowner, the top end of the cost would be $160 Billion. Since the enhanced down payments would be interest free, the federal government (i.e., the tax payers) would lose the inflation reduced value of the nominal amount of enhanced down payment money paid. However, virtually all, if not all, of the enhanced down payment monies would return in increments to the federal treasury over a 30 year period, if not sooner.
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