New Program For Homeowners

Due to the current debacle in the housing market, more homeowners have less than 50% equity in their homes than at any time since the government began tracking such things in 1945.  This means that if you bought a house for $200,000, you would own less than $100,000 worth of that house today, meaning if you were forced to sell it, you would take a loss.

The major reason for this loss is the current situation in the housing market.  A few years ago, lenders decided that they could make boatloads of money by selling houses to people who really couldn't afford them.  They did this by offering teaser loans, where the interest was very low for the first five years, then jacking the interest up to obscene levels five years later, knowing full well that the majority of these homeowners would not be able to afford the increased payments.

As an example, take a home that cost $200,000.  Since these people really can't afford to be homeowners, we'll assume that the loan they received was for the entire price of the house, without having anything for a down payment.  (Which would actually result in two loans, with two different interest rates, but to keep it simple, I'm ignoring that.)  At a rate of 3.5% the payments would be $898.09.  Let's assume that this amount is affordable to the homeowner, but just barely.  For the next five years they manage to make this payment each month, and all is well.

Now, five years later, their mortgage suddenly jumps to 7.0%, which means their monthly payment goes from $898.09 to $1,330.60.  They were barely hanging on at the lower rate, and now have to come up with hundreds more each month to make their payment.  Since their salary hasn't increased substantially in five years, where do they get the extra money?  For many of these homeowners, they're borrowing against their credit cards.

When the credit cards reach their limit, the homeowners often wind up in foreclosure, which means they lose the house.  Since the market has fallen, the house isn't worth what is owed on it, which means they have zero equity in the home.  Added to this, they still have to pay off their credit cards, which are at their limits.  These people are in debt for the rest of their lives.

Solution: for the housing market the solution is simple.  Take the original loan (in our example, the 3.0% interest rate) and convert it from an ARM (Adjustable Rate Mortgage) to a fixed rate, retroactive to the date when the interest rate increased.  Remove any late fees from the account, and re-adjust for any increases due to raising the rate.  In our example, return the loan to the original $898.09 per month and make it a fixed loan for the next 30 years.  What this will do is provide the homeowner with an affordable mortgage that they will be able to pay off over the course of 30 years, resulting in a profit for the lender, but not the profit they had hoped to receive.  Why this is a good idea is because failure to do this will result in the homeowner going into foreclosure, and the lender will lose money since the house is no longer worth the amount of money they loaned on it.  It's a good idea because it keeps the houses in the hands of the homeowners, not on the already too full housing market, and allows the homeowners to continue building credit and equity.  Everyone wins and no one gets taken to the cleaners.

Next solution: for the credit cards, the banks can make out very well here.  Reduce the interest rate significantly, say to 4% or 5%, with the stipulation that this rate is effective only if the payment is 5% or more above the minimum.  What this does is several things; it allows the card holder to pay off their debt without paying 20% in interest (which is just profit for the bank).  It discourages them from walking away from their debt, or declaring bankruptcy, and by structuring it so that they must pay slightly more than the minimum due, it allows them to reduce their debt faster, both with decreased interest rates and increased payment amounts.  What it does for the bank is allow them to project their profit margin over time, albeit at a lower rate than they would like.  It increases the minimum amount they will receive in payments each month, which increases their cash flow.  It also means fewer card holders walking away from their debts, as they now have the means to pay them.  This will result in lower debts for the bank, increasing their net worth (and their stock price).  Again, a win-win situation without anyone being unduly hurt.

So, who is offering these solutions?  Absolutely no one.  Corporate America is concerned with profits, and if those profits aren't huge, no one is interested.  Your government could enact legislation to assist Americans in financial need, but since the banks and lending institutions fund candidates, your elected officials aren't going to turn their backs on the companies that pay them to help their constituents.  It seems to me that if the government spent a portion of the money being wasted in Iraq to start their own lending institution, all of these homeowners could be spared the pain and embarrassment of foreclosure, and the interest they pay would benefit the government instead of major corporations.

Just an idea.