Choose Thinking: A Blog by Dan Gilbert

“For the strength of the Pack is the Wolf, and the strength of the Wolf is the Pack.”

- Rudyard Kipling

October 3, 2008

A Solution that Works

President Bush signed into law today the hotly-debated financial bailout plan, but in doing so, didn’t solve the real problem. We need to keep homeowners in their homes with affordable monthly mortgage payments and stabilize the “death spiral” in the housing market. Period.

That being said, I have a plan. If you like, share it. Email it. Blog about it. Send it to your Congressman. The only way this will happen is if you spread the word. So spread it.

The Problem

America is faced with the biggest housing crisis, and due to the ripple effect, potentially the biggest overall “financial crisis” in the nation’s history. Although there are still some details to resolve, this paper will set forth an analysis of the problem and propose a solution that is clear, sensible and attacks the problem where it needs to be:

At the ground level.

There are three categories of homeowners who are defaulting on their mortgages:

  1. Involuntarily: Homeowners who simply cannot afford the payments; OR
  2. Begrudgingly: Homeowners on the borderline of making their payments, but too many disincentives exist, in addition to the “stretch” of the payment itself, which pushes this group of homeowners to the default side of the ledger; OR
  3. Willingly: Homeowners who can afford the monthly payments but choose to “hand in their keys” rather than continue to lose money each and every month.

If we do not stop the tidal wave of defaults and foreclosures, the housing market will continue to erode as more and more inventory floods the marketplace.

Combining all of this with increasingly difficult underwriting standards and guidelines causes us to be left with a buyer pool that is shrinking and an inventory that is rising.

Growing supply. Shrinking demand.

The resulting “death spiral” creates a vortex that attracts more and more homeowners to default on their loans as they realize they owe more on their home than what it is worth. Struggling to make the payment of a loan on a home that is also declining in value is a DOUBLE WHAMMY few are willing to fight.

And if your loan is in the “negative amortizing” category (principal growing each month versus declining) then you have a TRIPLE WHAMMY:

  1. high and uncertain monthly payments
  2. declining home values
  3. a growing mortgage balance.

No rational person would not walk away from a housing nightmare such as this one.

More foreclosures cause increasing inventories (supply)… which cause prices to continue to decline… which attracts more homes into foreclosure… which cause prices to decline further… and so on and so on and so on.

A Classic “Death Spiral”

A declining home value by itself would normally not be enough to draw such a strong wave of homeowners into foreclosure.

The vast majority of homeowners in owner-occupied homes have purchased their homes first as a place to live and raise their families, and second as a potential solid investment.

But when you combine falling values with the certain prospect that the homeowner’s mortgage payments will increase substantially (adjustable rates) and either create no equity (interest only) or worse, actually increase a homeowner’s mortgage balance with each monthly payment, then the conditions create the “perfect storm” to sweep the housing and credit markets in America, which is exactly where we find ourselves.

Background

There is only one way out of the housing and housing finance crisis in America:

WE MUST KEEP HOMEOWNERS/BORROWERS IN THEIR HOMES
WITH AFFORDABLE MONTHLY PAYMENTS.

The outcome of any massive governmental intervention must result in an immediate, effective and significant curtailing of the increasing tide of homeowners who default on their loans.

There are three major issues with a subset of the current outstanding mortgage loans in the country that must be and can be solved to achieve this result:

  1. Adjustable Rate Mortgages: Unpredictable, and many of them are without annual or lifetime caps. When the lower “teaser rate” period is over (anywhere from 6 months to 5 years), the monthly payment increases so high that the new payments become unaffordable to the homeowner.
  2. Negative Amortization: (Mortgage balances getting larger each month) These are loans that artificially keep the “payment” lower but take the difference of “what the payment actually owed” is and the artificially lower payment and adds the difference to the principal balance. Thereby, the loan balance GETS BIGGER instead of getting smaller each month. A huge amount of these loans were written on the West Coast in what is typically described as “Option-ARMS.” And their day of reckoning is coming soon.
  3. Interest Only Loans: Loans that allow the homeowner to not pay principal each month thereby reducing the monthly payment by the principal amount that otherwise would be paid in a fully amortizing loan. Although these loans do not increase in principal (like negative amortization loans), their balances do not get smaller. Therefore, the only way a homeowner gains any equity while in one of these loan products is if the property she owns appreciates.

In addition, many of these loans allow “interest only” payments for an initial period of time and THEN begin fully amortizing after that initial period (typically 2-5 years).

So How Do We Solve This?

It’s not as difficult as it may seem at first. There are basically four primary stakeholders involved in this crisis:

The Homeowners with Troubled Mortgage Loans

It starts and ends with the large group of homeowners who are in as serious of a financial and personal challenge that they ever will face in their lifetime. In addition, this is THE ONLY place this crisis can be resolved. To think it can be fixed any other way is not rational and will only delay us from eventually being forced to fix it at the homeowner level, or worse, deepening the crisis by delaying the inevitable solution or by the unforeseen consequences of the other more “synthetic fixes,” such as the one that became law earlier today.

Again, the only way out here is to keep people in their homes, stop the rising supply of homes, the declining price of all homes and the ‘death spiral’ from continuing to wreak havoc on American homeowners.

We would then see a recovery, which will first stabilize prices, and eventually, see prices rise again, albeit at a more normal market pace, versus the large and artificial increases driven by absurdly lax qualification guidelines and easy no barrier financing so widely available over the last several years.

Neighbors of Homeowners with Troubled Mortgage Loans

One of the most difficult challenges in creating a solution that achieves the most good for the entire housing market is the inevitable conflicts and overall fairness between any group of homeowners who receive some form of help and those who do not.

Since all Americans who own and occupy residential homes are affected by the amount of inventory and overall strength of the housing market, there is a less measurable and less immediate direct benefit for this group, but in the end, certainly a no less valuable outcome in the stability and eventual appreciation of their largest asset.

In addition, we believe our plan has achieved the least amount of unfairness among homeowners in that no principal reductions are granted, which is usually the focal point of any strong argument of inequity of a solution that by its nature will cause some legitimate concerns.

The Taxpayer/Government

Clearly, the least amount of cost with the least amount of risk in any government intervention is best for the taxpayer. A solution that grows our already high national debt the least is clearly preferable. Not to mention an answer that does not create another large federal bureaucracy which puts way too much power over our housing market and our entire economy, in too few hands is also one that all parties, taxpayers, homeowners and lenders would agree is better.

The Bondholders/Investors

Basically, the owners of the current loans themselves (whole loans) that are outstanding or owners of pieces of “securitizations” that have been issued to the marketplace and backed by a large “pool of loans”.

These securitizations are divided into “traunches,” which are basically a waterfall of rights in respect to the cash flows of principal and interest paid by the borrowers of the individual loans within the pool of loans that “back” the securitization. These traunches are typically labeled AAA (the least risky of the traunches) down to AA, A, B, etc….with the most risky called the “residual piece” (and owned by the issuer itself and/or the servicer of these loans).

Basically, the AAA’s get paid first, AA’s second and so on. The AAA piece is the highest priced piece with the least risk and, therefore receives the lowest interest rate (because it is guaranteed to be paid FIRST before the other pieces). The higher rate stuff is at the bottom of the waterfall and has the highest degree of risk because the bottom pieces absorb the losses of the entire securitization first.

Many banks, (domestic and foreign), Wall Street firms, mortgage banking companies, insurance companies, pension funds, hedge funds, foreign governments, Fannie Mae and Freddie Mac, and others have already taken huge losses on either the whole loans themselves they may own or the securitization pieces that they own.

In fact, these actual losses along with the accounting concept of “mark to market,” where the institutions that are holding these debt instruments are forced to “mark the value” of the loans or securities to the current price of the market EVEN IF THE LOAN IS PERFORMING AND EVEN IF THERE REALLY IS NO MARKET!

This alone has forced many big financial companies whose names we don’t need to rehash here to either file bankruptcy, merge with other stronger and bigger institutions, be bailed out by the government, receive loans and guarantees from the government, be forced to merge by the government with other stronger private entities or be taken over by the FDIC in a few of the bank situations.

When you are forced to “mark to market” loans or securities that are performing and where there is no market price, suddenly, your assets are reduced to a very low number. Then your own banks stop lending to you because your assets are suddenly NOT worth what they were the day before you ‘mark’ them down and parts or all of your capital and/or net worth is wiped out in the process.

“Wallah.”

This is how so many household names were operating soundly with thousands of employees on a Tuesday as they have for many decades and then on Wednesday morning they are either “gone” or turned very quickly into something else.

The Recently-Passed 700 Billion Dollar Law

The recently-passed $700 billion law (aka the Troubled Asset Relief Program or TARP) sets up the feds to BUY whole loans and securitizations from the various owners of these securities to “clean the balance sheet” of these institutions and rid them of their “bad debt,” theoretically freeing their balance sheets to stay in business.

Although the passing of this monumental bill may eventually restore some confidence and stability in the banking system and credit markets (though you couldn’t tell from the stock market, which fell over 450 points from the time the House passed the bill at 1:00pm until the close of the market at 4:00pm), it will do absolutely nothing to stop the carnage and “death spiral” in the housing market.

The theory of this new law is that the government will potentially “modify” some of these loans and therefore, the housing market will recover and maybe even the government will not lose so much on the securities they bought as prices of these securities recover.

There is a huge price any institution will pay to the feds in the form of actual equity issued to the government for any “losses” the government takes on in the ultimate disposition of these loans and securities.

The law gives the Secretary of the Treasury huge sweeping powers to fill in the blanks on many of the very complex details involved here and creates another bureaucracy that is both expensive and unnecessary.

There are conflicts all over the place that are unaddressed surrounding the servicers, owners of the loans and securities, the seller’s of the loans, etc… Some of the basic questions such as the following have not been answered:

  1. How will the fed agree to a price to buy these loans and securities? A “reverse auction” has been mentioned. That does not work considering that each loan and each security is very different from each other. How will “the seller offering the lowest price” be the seller of their assets to the fed when there are no two assets that are even close to being alike?
  2. The lower the price an institution sells to the fed then theoretically the less amount of EQUITY that the selling institution has to “give up” to the fed to reimburse the fed for buying their bad or unsaleable assets. That means that there will be a huge conflict in the fed’s goal of strengthening these institutions (by removing the bad stuff off their balance sheets) and the incentive for the institution to actually sell the loans and securities for the LOWEST price when most of them probably believe it would be better to take the hit now then give away huge chunks of equity to the government.
  3. How does cleaning up the balance sheets (highly questionable if it can work) going to help the homeowners and borrowers who are in trouble? Cleaning up these balance sheets and buying weaker assets does not increase lending to American homeowners by one penny. Although guidelines have toughened everywhere, there are still numerous banks, credit unions, mortgage bankers and mortgage brokers where borrowers can get approved for an FHA, VA, Fannie Mae or Freddie Mac type loan. The fact that some of these banks now have some room on their balance sheets does not mean they are going to expand into loans that are not offered in the market now by numerous companies. Certainly, offering loans with expanded or different underwriting guidelines is not the goal is it? Isn’t that what got us into trouble in the first place? At maximum, freeing these balance sheets will only allow some additional room on some lenders’ balance sheets to offer the SAME FHA, Fannie Mae and Freddie Mac loans that are already widely available.
  4. Only the weakest entities will utilize the plan. The severity of the pricing and the restrictions on compensation will mean that only those that HAVE to use it will.
  5. This means the plan will be adversely selected. In a sense, the weak will be assisted directly, the strong, only indirectly.
  6. If the government begins aggressive workouts of the loans it purchases, then only a random lucky few will find themselves the recipient of a bailout.
    1. If Joe borrowed $300,000 to buy a $300,000 home and if Joe lived extravagantly, and if Joe was financed by Weak Bank that sold to the US Government, and if the home is now worth $200,000 – Joe may well get his balance written down by $100,000 – or some other major benefit to “work out” his loan.
    2. If Sue, Joe’s neighbor, saved hard and put $100,000 down to buy her $300,000 house, and if Sue lived within her means and Sue was financed by Strong Bank – Sue likely won’t get helped at all.
    3. If Sam, Joe and Sue’s neighbor, borrowed $300,000, and lived just like Joe, but Sam was financed by Strong Bank (and wasn’t sold to the government), Sam might not be offered any help either.
  7. This kind of massive inequity will create chaos:
    1. Tremendous resentment will result when those who did the right thing see their spender neighbors get bailed out.
    2. The logical outcome will be for those who maintained their payments to either go delinquent to get help that is being doled out or to walk away from their homes altogether.

How long will it take for the $700 billion law take to make any impact? This solution will take months to even get rolling. The complex nature of loan by loan modifications or refinances and the complex nature of buying these loans and securities which are all unique and need their own individual due diligence is an enormous task and one that the federal government is ill equipped to execute. In fact, many companies that have been in this complex business for years and years are not equipped to do this work.This new law is the biggest “rescue plan” in world history developed by a handful of well-intended folks in Washington reacting understandably to the immense pressures of the increasingly shaky and nearly out of control credit markets.

But this new 700 billion dollar law will not solve the root of the problem:

The Housing Crisis.

Not even close.

And it must be solved.

Now.

There is a better way. A cheaper way. A quicker way. A more effective way. The RIGHT way.

THE SOLUTION

There is a solution that…

  1. Keeps homeowners in their homes with predictable FIXED amortizing monthly payments.
  2. Costs the taxpayers FRACTIONS of the 700 Billion dollar “rescue plan” with less complication and bureaucracy.
  3. Gives the investors and owners of the loans and securitizations significantly higher odds of recovering their investment in these loans and securities versus the expensive foreclosure and resale of properties in a declining “death spiral” of a housing market.
  4. Will stabilize prices, stop the free-fall in home values (the heart of the entire catastrophe).
  5. Can be implemented in a very short time frame.

The federal government should enact a bill that applies to the following loans and homeowners:

  1. Adjustable Rate Mortgages (ARM) that do NOT have a 2% or lower annual cap (or the intervals of adjustment greater than one year without a 2% or lower interval adjustment period) and a 6% or lower lifetime cap (this covers much of the bad sub-prime ARMS out there)
  2. Any “Option ARM”. (OARM) These loans were taken out by prime borrowers with larger loan amounts primarily on the West Coast. These homeowners are destined for trouble. They have mortgages with significant negative amortization, which inevitably will produce the same kind of adverse payment shock inherent in subprime ARMs. These loans create negative equity because they have built-in negative amortization. Homeowners with these exploding mortgage balances face both negative equity andhuge payment shock. In essence, these loans convert prime borrowers into the most adversely affected subprime borrowers. Not to mention plummeting home values.
  3. Any “Interest Only” (IO) loan, adjustable or fixed, that is scheduled to turn into a “fully amortizing” loan in the next 4 years.

The servicers of any loan who meet the above criteria will be required under this proposal to:

  1. Reset the borrower’s rate and term immediately (in the next 90 days regardless of when their next adjustment is due) to a 6.375%, 30 year fixed rate fully amortizing loan.
  2. For a period of 3 years from the “reset date” the federal government subsidizes the homeowners 6.375% principal and interest payment so that the homeowner is actually paying at a 4.875% rate, on a 30-year fixed, fully amortizing program. The bondholder/investor gets paid at 6.375% but the borrower pays as if she is paying at 4.875%. In other words, 1.5% of government subsidy for these loans for the first 3 years or 4.5% max per loan. (Many mortgages will have less than this cost as some borrowers and homeowners will sell their homes and move or potentially even refinance to other available products during these first 3 years).
  3. In the 4th year the subsidy is reduced to 1.00% bringing the homeowners’ paying rate up to 5.375%. In the 5th year the subsidy is reduced to 1/2% bringing the borrowers’ paying rate to 5.875% and in the 6th year there is no more subsidy and the homeowner is now in his 6th year of a fully amortizable 30 year fixed rate paying 6.375%. And it stay fixed from the 6th year through the 30th year or until the borrower sells the home or refinances.
  4. The owner of the whole loan or the trustee of the securitization should get a one-time shot or incentive to “write off” any “negative equity” (actually, deferred interest) that has been built up since the beginning of the loan until the time of the reset. The investor is entitled to receive 2X the normal write off should they forgive the borrower’s deferred interest (a very strong incentive at 2X the write off). Obviously, the borrower’s should not be taxed on what amounts to a forgiveness of deferred interest.
  5. The borrower must have lived in the property since obtaining the original loan and must currently live in the property. Basically, owner occupied only.
  6. Void any and all pre-payment penalties on these loans.

There is no need to tamper with the principal amount if the homeowner is given affordable long-term fixed-rate financing, and therefore can afford monthly payments. (Homebuilders have been providing subsidies for decades when, during the course of building out subdivisions over many years, there are times when house values have decreased. They do this to maintain nominal values. Indeed today homebuilders are giving subsidies of approximately 19% of selling prices in order to sell homes without reducing nominal values).

The least expensive, least risky and fastest way to keep homeowners in their homes, without potentially modifying or refinancing millions of mortgages at enormous cost to financial institutions and our own government and taxpayers, is to give homeowners affordable fixed rate financing for a long time period. The risk of adverse payment shock is 100% eliminated. Simply doing this will significantly reduce foreclosures, stop the “death spiral,” stabilize home prices and at the same time not be an outrageous cost to U.S. taxpayers.

Especially compared to $700 Billion.

In addition to the loan-specific pieces of our proposal, we agree with the many other voices that are calling for a change to the “mark to market” accounting rules that have been equivalent to throwing lighter fluid on a fire. Although there have been various proposals made as to how to change this rule for the better, here is one way to approach that piece of the puzzle:

Revise “mark to market” accounting rules to allow holders of performing and current residential loans and securities where the market that would normally indicate a dependable price is either too thin or simply does not exist to book these assets at the purchase price or face value.

Benefits To The Homeowners

Let’s take a look at the significant benefit to the borrower’s who will be helped by this plan. Whether the borrower falls into any of the three categories outlined above: ARM, OARM or IO, the overall theme is:

  1. Fix his payment at a subsidized lower rate for a period of 5 years and fix it for good at a solid rate in years 6-30.
  2. Stop any negative amortization (and hopefully, write off any existing negative amortization/deferred interest).
  3. Begin regular principal and interest payments immediately thereby making sure the borrower is actually “digging out” with each payment versus “treading water” or even “sinking deeper.”

Example One

A married couple bought a home in June 2006 for $222,222.00 and obtained a 90% loan-to-value (LTV) loan creating a $200,000.00 mortgage loan on a “2/28 ARM” with the first two years fixed at 6.5% principal and interest, which gave them a monthly principal and interest payment of $1264.00 for the first 24 months.

In August of 2008, the 2/28 mortgage plan adjusted their rate up to around 9% with a corresponding adjusted payment which now increased to $1595.00, which is a 26% increase AND the payment now adjusts every 6 months going forward to a margin of 6% OVER the LIBOR index, which we all know is a very unstable index that can have dramatic rises in short periods of time. The LIFETIME cap on these loans are as high as 7%-10% over the start rate, meaning a sub-prime ARM could rise as high as 16.5% in this example!

This proposal would move this homeowner to a 4.875% 30 year fixed rate fully amortizing loan with a payment of $1034.00 which saves this homeowner:

$561.00 savings per month and savings of $6,732.00 in the first year.
$661.00 savings per month and savings of $7932.00 (or more) in Year 2
$761.00 savings per month and savings of $9132.00 (or more) in Year 3
Total savings $23,796.00 over 3 years.

Years 4 and 5 will save the homeowner an approximate total additional savings of $13,500.00.

The principal will have been paid down to approximately $182,600.00, or $17,400.00 since the original $200,000.00 loan was funded.

This plan put this homeowner ahead by:

$54,696.00 over the first five years

It FIXES their rate and payment in for 30 years (with an additional subsidy the first 5 years).

These homeowners begin to pay off their loan faster and by removing any pre-payment penalties have the option of applying any of the payment savings to payoff principal faster.

The borrowers will now be making payments in a STABILIZED housing market and although they still may be under water for a period of time, there is a light at the end of the tunnel in that their payments are affordable, their loan is being paid down and their payments cannot go up.

In addition, their property may rise in value somewhere down the road which would even be a bigger win.

Example Two

Another family took out and closed on an “Option ARM in June of 2006. Same as above. $222,222.00 purchase price and a $200,000.00 loan amount.

The homeowner made 24 payments and his principal GREW to $216,000.00 because of the negative amortization (deferred interest) and his “option” of making the “lower payment” and deferring the “difference” of what the real payment would be and adding that “diff” to the principal.

In addition, his house has LOST value.

Each payment he makes GROWS his principal.

His house is continuing to go DOWN in value.

And soon his payments will GO UP based on the terms of his current Option ARM loan

Our plan incents the owner of the loan to write off the deferred interest of $16,000.00 dollars in exchange for a double tax deduction.

The homeowners lock in their payments at the same rate and terms as described in “Example I” above.

Again, huge SAVINGS in the monthly payments for at least 5 years.

FIXED PAYMENTS AND ZERO CHANCE of payments going up over the very good rate and payment of 6.375%.

NO MORE negative equity (deferred interest).

Their loan begins to immediately amortize so balance is now DECREASING each and every monthly payment they make going forward.

They are now in a STABILIZED housing market.

Get the picture here?

Homeowners could live with a period of time where they are “under water” but NOT if their home continues to go down in value, their balance does not amortize or worse yet, goes up and there is near certainty of their PAYMENT rising as well.

Our plan takes care of all of this and then allows the borrowers (and the resulting stabilized housing market) to work their way out of the “upside down” situation this family finds itself.

Psychologically, it is now a “temporary” circumstance from the homeowner’s outlook with a strong light at the end of the tunnel.

Cost To The Tax Payers

There is about $12.1 trillion of total residential mortgage debt outstanding according to OFHEO.

$900 billion of this total is in sub-prime ARM loan balances (7.4%)
$500 billion worth of “Option Arms” are out there and about to explode (4.1%)
$600 billion represents “interest only” loan balances
(both fixed and ARMs which are not sub-prime or option ARMs) (5.0%)
$2 Trillion Total of the most risky loans in our housing market (16.7%)

Approximately 70% are owner occupied (This proposal would only apply to owner occupied loans).

For this and other various reasons, let’s assume that 50% or $1 Trillion worth of these loans take the government up on this offer should it become law.

Under our plan, the maximum amount any single loan could be subsidized totals 6% (see 5 year plan above).

With some early payoffs, amortization of the loan amounts, etc…we conservatively will use a 5% average subsidy, spread out over a total of FIVE years for the program.

5% of 1 trillion equals 50 billion.

$50 billion over 5 years (weighted more in the first 3 years) versus $700 billion dollars in the first year.

Plus some amount of reduced taxation revenue due to the proposed double tax deduction for the write-off of any deferred interest mentioned above. But the cost of this tax incentive would be dwarfed by the resulting massive write-offs from a plunging and devastating housing market.

5 MILLION homeowners stay in their homes with VERY LOW FIXED RATE AMORTIZING PAYMENTS.

Not a dime of principal is forgiven, unfairly hurting the neighbors and neighborhoods who undoubtedly will live very near and around the five million homeowners who will receive the benefits of our plan.

Because home values are a function of the amount of inventory and recent sales prices of similar type and sized homes in the same geographic area, a strong case could be made that any and all neighbors of a homeowner who receives our proposed “bridge of help” benefits significantly in the resulting stability of the value of homes in the entire vicinity. It is important to note that this outcome is achieved WITHOUT forgiving a dime of “principal,” which would be sure to ignite a firestorm of justifiable cries of inequity. Especially, when any potential “principal forgiveness” would be administered in a random discriminatory nature based on the luck of whose loan ended up with which bank that happened to be an institution that was forced to sell it to the government.

Immediate stabilization of the housing market.

Bondholders and owners of the whole loans are THRILLED.

Yes, they reduce their “theoretic” rate of return in many cases, but how much ahead are they versus foreclosing, losing 30-50% of the loan balance and continuing to spread the “death spiral” of the housing market which will only hurt all of the other home’s values they also will have in their unsold inventory of Real Estate Owned (REO).

And what’s wrong with a 6.375% rate of return and eventually getting most or all of your principal back?

Conclusion

The recently-passed 700 Billion dollar plan does NOT get our country’s housing market even close to being on the road to recovery. Although it may restore some confidence in the banking system, this new law is incredibly expensive, creates another unnecessary federal bureaucracy and does NOT in any way, shape or form address the root problem:

KEEPING HOMEOWNERS IN THEIR HOMES AND STABILIZING THE “DEATH SPIRAL” IN THE HOUSING MARKET.

Our plan does the job and costs $50 Billion (at most) spread out over 5 years. That’s 1/14th the cost — or 7% — of the 700 billion.

Our proposal here or a similar one must be launched in the very near future to avoid a housing and economic calamity the likes of which we have never witnessed.

To paraphrase a Henry David Thoreau quote, we can find a thousand ways to hack at the branches of this enormous problem or we could strike at the root.

It will take a herculean effort to do so, but not one that is unprecendented in our great nation’s history.

After all folks, let’s not forget that this is the United States of America.

Dan Gilbert
Chairman
Rock Holdings, Inc.

PS: I would like to thank two colleagues and good friends of mine who contributed to this plan: the Former Chairman and CEO of Pulte Homes, Jim Grosfeld, and the Chief Economist of Quicken Loans, Bob “Bobbeh” Walters.

Click here to download the PDF version of A Solution that Works so you can print and share with friends, family and others.

Posted by: in Real Estate & Mortgage, Your Money & The Economy | Comments (60)


60 Comments »


  • Comment by Mack — October 7, 2008 @ 10:54 am:

    THANK YOU, I HAVE BEEN SAYING THIS FOR OVER A YEAR NOW. ADJUST THE RATE ON THESE SO CALLED TOXIC LOANS NOT THE PRINCIPAL. IT’S GOOD TO HEAR IT COMING FROM A RESPECTED, CERTIFIED EXPERT IN THIS FIELD. I HOPE WE CAN GET THE GOV TO LISTEN & ACT ON IT. GREAT JOB!
    NOW HOW DO WE OPEN THE LENDING MARKETS BACK UP?

  • Comment by Sam — October 7, 2008 @ 2:26 pm:

    TOTALLY Disagree!! The “homeowners” who are now in houses own nothing. They have ZERO equity, and chose to have ZERO equity on most of the mortgages they initiated. I know there are some exceptions, but they decided to gimmick the system. I will be happy to have the people living in these houses pay rent to “us”, but to reward their past behavior is crazy. So the solution is simple – but not as described in this article. The solution is keeping these people in “our” homes, and them paying rent to “us”. “We”, hopefully, can then sell these houses when things stabilize. Think about it!!

  • Comment by Jim — October 7, 2008 @ 2:35 pm:

    Can we actually put this as a proposal in the hands of the president and the economic powers that be?

  • Comment by Jay R. Wren — October 7, 2008 @ 3:07 pm:

    Its a great plan, but I don’t think it goes far enough.

    I’d go with 1% anual max and 4% lifetime max limits on ARM

    Also, in extreme conditions, I’d be in support of stretching 30yr loans out to 35-40 yrs and reamortizing based on that longer term.

  • Comment by Don — October 7, 2008 @ 3:25 pm:

    Sam,

    Do you really believe that the American people will see a returnon the bailout? Do you really? If so then I can opnly say that you need to be “slapped” into the reality of life.

    The bailout was organized theft of the taxpayer dollar, with plenty of bribes to ensure it’s passing.

    The public should be getting angry. If not we have become completely lethargic and deserved of any monstrosity that should come our way.

    Dan Gilbert has offered us the only solution that has a chance of working.

  • Comment by Olin Shrock — October 7, 2008 @ 7:00 pm:

    I fully agree with the plan… It presents a win-win situation with minimal government investment, while “saving” the homeowner or at least presenting a solution that can be applied to an individual situation. There will always be those who are willing to “throw” money at a problem without ever giving any thought to a workable formula.

    The American taxpayers will profit very little from an ill conceived plan, hurried through Congress. To assess blame on a few is the usual way most people have of thinking…It is the fault of the “Many” rather than the “Few”. No one will ever admit that they are fully responsible for the problem,,,,Even a criminal action involves more than one party.

    This may work Dan, if we can convince others that their plight isn’t hopeless…..

  • Comment by Martin Schmitt — October 7, 2008 @ 9:20 pm:

    Dan,
    1. Your proposal appears plausible (certainly more so than the proposed bailout) to a layman like myself. My only suggestion would be to tighten up your writing. It takes too many pages to get to the punchline. Put an “executive summary” at the top, then go into the details.
    2. Why our fearless leaders can’t come up with an effective solution like yours is another scathing indictment of our administration.

  • Comment by Charyl Gordon — October 8, 2008 @ 8:15 am:

    Still think somehow the guy who got the 30 year fixed rate, does what they are supposed to and is the one paying for all this ought to get some help. These days everyone is tight!!

  • Comment by Sam — October 8, 2008 @ 10:54 am:

    I have never suggested that the American public will get a return on this bailout. Where did you read this in my response? So back to the facts – I not think that rewarding Dan Gilbert (or anyone else) is the answer – but giving people another mortgage is not in anyone’s interest except the mortgage companies. Let me repeat – most of the people in trouble today own nothing in the way of equity in their houses – they did not invest anything -they are renters and should stay that way. Who came up with zero principle payment mortgages, no document mortgages, balloon mortgages, etc.? It was not me – it was not congress. You know who it was, and now what these same mortgage brokers to get rewards and profits again. The bailout is bad, but so is the Dan Gilbert plan – you are just asking us to reward the same group of people that had some responsibility in the mess we are in (along with the “regulators”, the people taking out the mortgages, etc.). We need to bring back responsibility on everyone’s part, including the lenders.

    I would suggest you need a slap in the face (as you suggested I should get) for not reading my comment, and posting a completely unfounded reply.

  • Comment by Jim — October 8, 2008 @ 9:27 pm:

    Sam:
    You suggested a return when you stated, “The solution is keeping these people in “our” homes, and them paying rent to “us”. “We”, hopefully, can then sell these houses when things stabilize.”. I’ll be honest, don’t completely understand the “us”, “we”, and “our” language you were talking about, but I digress.
    The bailout is giving the banks/lending institutions $700 billion. The Dan Gilbert plan only provides $50 billion. Which would you prefer? I’ll take the lesser of two evils and actually help the housing market and individual homeowners (not only the homeowners being helped out with a subsidized loan, but the homeowner whose home value will stabilize in the process) at the same time. It’s a no brainer Sam. Is it still wrong? Yes. But, in the scheme of things, much less detrimental to the taxpayer and it goes a long way to help stabilize the housing market. It doesn’t help the mortgage brokers either. The loan subsidy will come from the govt. No closing costs are involved or any closing at all so the loan officer doesn’t profit.

  • Comment by Frank — October 9, 2008 @ 10:33 am:

    good idea. how can I sign up?

  • Comment by Ann-Marie Murphy — October 9, 2008 @ 10:45 am:

    Great question Frank! There are a couple of things you can do to help. First, spread the word! Tell your friends and family. Use the “Share” link just below the blog entry to send it to your social networks or via email. Let them know about this blog so they can join the conversation.

    Another thing you can do is get in touch with your Congressman. Let him/her know how you feel about the housing crisis and your support of “A Solution that Works.” If s/he hasn’t heard of the “Solution,” send him/her a copy! Not sure how to get in touch with your representatives? Visit our website dedicated to “A Solution that Works” for contact information and other details: http://www.asolutionthatworks.com/what-can-i-do/

  • Comment by bob — October 10, 2008 @ 8:24 am:

    Mr. Gilbert
    Here is why your plan will not work. You do not take into consideration any other expenses a typical family has. Let me explain, Let’s take a typical family household income of $66,000 per year. They purchased their home in 2004 for $225,000. The current market value is $190,000. They have two mortgages. Mortgage #1 is 180,000- 6.75% interest only, Mortgage #2 is 45,000-8.75% principal & interest.
    Their current dti is 49%. They have average family expenses. 2 $350 per month car payments, $2000 for annual vacation costs, etc. Nothing extravagant about their lifestyle. Children go to public schools.
    This family experiences an annual deficit of $11,387 Even if you cut their interest rate to 6.25% and knock their mortgage balances down by 70% they are still in the hole by $7000 a year. Your plan will not work.
    The problem is that food, auto expenses, insurance, credit cards and taxes consume 71%of their gross monthly income. You only have 29% left over for housing, and other basic essentials. This country needs to implement a national insurance , food subsidy program and lower the effective tax rate for families making less than 100,000/yr. When this is done than your plan may make sense.

  • Comment by Harry — October 10, 2008 @ 1:21 pm:

    Who gave these people loans that they could not afford ???…sorry charlie you lose ……why should people that are responsible bail out fat cats and fools that were not responsible enough to know what they could afford …my plan …you can’t afford your house , you lose it.

  • Comment by Eugene Carter — October 10, 2008 @ 2:47 pm:

    Your plan certainly make more sense than the one offered by Mr. Paulson but we are in the war on this economic crisis and must strick a balance I agree the fix must begin with the homeowner to help keep the majority of them in their homes to stablized the supply on the market. But we also must fix how mortgage wil be written in the future. A debtor will always be a servant to the lender so a happy medium would be to cut the length of time down from 30 years to a maximun of 15 years with a 5,7 and ten years in between with fixed rates full documented loans. which will make the U.S. more of a owner nation nation rather than a debtor nation. The build up of equity in these properties could solve many other economic problems such as, education,supplement retirement income and more. Just a taught. Gene

  • Comment by Gil — October 10, 2008 @ 6:25 pm:

    To Harry: I’m one of these homeowners and cannot believe your arrogance and ignorance to make a statement that we are in homes we cannot afford. In case you haven’t noticed, you or someone close to you will find themselves in this same situation, as the country is broke. Instead of blaming the homeowner who can’t afford their home, look at WHY MOST people are losing their homes-they’re not affordable anymore because the jobs are gone and all the necessitites, food, gas, utilities, etc keep increasing! My husband and I are self-employed and did not purchase a McMansion, do not have car payments, vacations or high credit card debt, but NO ONE is spending money. Enjoy your high horse because you’ll soon be falling off it. By the way, we put a substantial down payment down, so WE DO HAVE EQUITY, my sin was getting into interest only on the 1st mortgage and the economy taking a dive. Not all of us are irresponsible and it’s too bad you don’t look at the big picture. The more people that lose their houses just drop the value in your house and raise your property taxes, HOA fees, etc.

  • Comment by John W. Mayer — October 11, 2008 @ 10:31 am:

    In my view it seems everyone misses the real problem; companies that are too big to fail. Let the investors in bundled mortages lose their money. The only thing government should be doing is protect americans. Monopoly laws should have limited fannie and Freddie.

    Now that the government has screwed it up, if the feds move money to institutions, it should be to proven successful lending institutions, one time, then the feds need to get out of the way.

  • Comment by M.FRED MINTER — October 11, 2008 @ 11:29 pm:

    Dan, you have taken the words our of my mouth. I have been preaching the mantra that we can only bail out of this crisis by stabilizing the housing market. I submitted a similar solution to Barak Obama. I suggested a national Section-8 program for home owners. It works very similar to your plan, the most important part of which there is no reduction in the principle mortgage. That’s important because the owners of these mortgages are investors and retirement plans that pay their members as a return on the principle. And the lower the principle, the lower return to these owners. It could be disastrous for retirees who depend on these 401k payments.

  • Comment by Gary Freeman — October 12, 2008 @ 12:30 pm:

    Brilliant & simple. How do we make this happen quickly ?

  • Comment by Dean Malone — October 12, 2008 @ 12:59 pm:

    This is not going to work. As long as housing prices keep falling, people will tip over to bail when they hit their personal negative equity threshold of pain. We need to get at the ROOT cause of all this. The banks won’t lend money to businesses because they’re concerned that opague derivatrives held by counter-parties will cause them to default if we get a major corporate failure. That is the “sawdust” that is grinding ALL the gears to the fault. Any solution must address this FIRST. So what’s the answer? Government has the right to issue money so why not declare all derivatives null and void? Follow it up with a law that says only derivatives listed on CME and/or some other exchange and backed up with real collateral will be lawful. The risks will instantly evaporate and nobody will get hurt – including the taxpayer. Credit will magically free up, business will skyroicket, inflation will kick in with a vengeance and it will be party times all over again. I am amazed that there is not enough common sense ANYWHERE to see this obvious cause and effect.

  • Comment by steev — October 12, 2008 @ 2:22 pm:

    so once again the taxpayer gets screwed.
    with your plan i loose the points that i paid to reduce my mortgage, these benefactors will have lower declining principal. so they grow wealth faster than the taxpayer.
    so not only do it help the subprime borrower now but later.
    sounds like socalism. why not doing something like Fed Student Loan Programs. Where the Gov. will get there money back. Lets take the 700B and build a prision, review loan applications for fraud and give the borrowers an option jail or payback the note.

  • Comment by anon — October 12, 2008 @ 2:37 pm:

    It is foolish to think there will be no pain after the biggest credit bubble in history with loans given to anyone with a pulse…and suddenly a down housing market with tightening credit….you can give the “banks” “money” to lend…but if no one wants the money…there’s no lending…especially with all the offbalance sheet mumbojumbo…

    Ron Paul is right… the FED and fractional reserve lending is the problem…

    The above comment is NOT INVESTMENT ADVICE… just some random thoughts on reading this…

  • Comment by Evelyn — October 12, 2008 @ 3:46 pm:

    I totally agree with a 5 year interest only plan that allows people to stay in their homes. In addition we need to stop the lending to people who don’t have a reasonable means to repay (ie what ever happen to total debit not exceeding X% of your income??) and we have to prevent all of these people who enjoyed the good times from simply being able to walk away or file bankruptcy. The debit remains theirs. The interest gets reduced. Let the lenders feel some pain in all of this. There needs to be reform of the whole credit industry. I continue to see credit card offers and credit cards extended to people who simply won’t be able to repay the principle. Then the banking industry looks to the middle class to pick up the tab. That’s why I simply don’t have faith in any bailout plan. No one will addres the problem that has/is causing this. The AIG executives should be reporting to a congressional subcommittee and should be forced to pay back the junket they just went on minus reasonable expenses. Doing this will start to restore some faith. Finally, having someone stand up and starting to address the white collar crime these executives and congressman (who accept free gifts to vote a specific way) and actually put them in jail for years and take away the money they taken from others will start to restore faith in our government. Unfortunately until we do that, we will continue to work our way down into very bleak economic times. Very discouraging considering so many of us have worked hard, and saved for retirement and to find out our government did not do their jobs for so long. I think we also are going to have to address that. Perhaps, in the end we need an overhaul of our government. I find it simply uncomprehendable that I have paid the salaries of so many and none of them saw this coming. I was definitely a McCain fan, but I’m actually hoping by electing a newer comer to the game that perhaps he actually is more interested in this country than in serving himself.

    Sorry for the tirade, the whole mess and my not doing my part to rectify it sickens me. If there is more we need to do as individuals to help straighten out this mess. Add my name to a list.

  • Comment by Oliver — October 12, 2008 @ 7:37 pm:

    The American tax payer is rightly pissed. But, we are all pissed for slightly different reasons. Arguing is passive enough that the government can do whatever they want while we argue. I don’t know what to suggest, but I know that it doesn’t matter how brilliant a plan we come up with and collectively agree with, our elected officials don’t want to hear it. So, we continue to argue.

  • Comment by Gordon — October 13, 2008 @ 9:14 am:

    Your plan makes a great deal of sense, however, allow me to offer a few points which could potentially serve to enhance its power followed by a few implementation ideas.

    1. The Problem of Excess Supply: Your comments about ‘excess supply’ are right on point, but I would invite you to consider this – the excess supply problem can only be fixed if BOTH the increase of homes hitting the market is slowed (your plan addresses this) AND the current overage in supply which already exists is decreased. Thousands upon thousands of homes are already out there being bought up for pennies on the dollar which is destroying home values in general. Your plan to keep troubled homeowners in their homes is a wonderful idea, but keep in mind that for many people, the foreclosure process has already longed passed.

    2. Inequity: Your concern about inequity is justified, but despite this, I believe the solution to this problem needs to DIRECTLY benefit more homeowners than you are suggesting. Consider 2 groups of homeowners – the homeowners who are termed investors, but actually provide PRIMARY RESIDENCES to families (yes, candor dictates that I disclose the fact that I am one of these), and those who are current on their payments, have solid credit and cash flow, and would welcome the chance to refinance to better terms but only lack the ‘perceived equity’ in their property due to sales of homes at greatly depressed prices. As an example, consider what would happen if every ‘landlord’ with a mortgage on a property were to lose their homes AT THIS MOMENT….the result would be thousands of families looking for a place to live. Again, while I see your point about inequity, I still believe more groups of homeowners need to be given some sort of DIRECT benefit from your plan.

    What to do????

    Here’s a few thoughts around some potential implementation ideas. Please understand these are presented from a ‘think tank’ type of perspective, and thus, prolonged explanations of plans are not outlined ( you will however see from my closing remarks that I would welcome the chance to discuss these):

    1. Allow ‘investors’ who are providing primary residence to someone to receive benefit from your plan. This could be in the form outlined in your plan, or could also be accomplished through some sort of relief on paid non-homestead taxes.

    2. Take measures to ‘clean-up’ the existing excess supply of available homes. This could be done through a centralized method (allow states to intervene in regards to owning currently available foreclosed on properties) or a de-centralized method (provide buyers of these properties with low-rate financing, tax breaks (i.e. relief on non-homestead tax rates), and other incentives for taking ownership in these homes, repairing them, and providing primary residence). Some combination of these measures could also be utilized.

    3. Open up the relief you propose to more debt owners: It seems to me that when we talk about refinancing OF EXISTING DEBT ONLY that perhaps all debt owners should have the opportunity to explore an avenue something like the one you propose. While the cost might be greater, consider this, allowing more americans to take advantage of a form of your proposal will only serve to free up even more disposable income in more households.

    4. Debt reduction: I know you’re basically against this, but I do think there are places where an argument could be made that this could be justified. As an example, owners of ‘negative amortization’ loans could be given relief back to the original amount of the credit. One could perhaps also argue that ‘severly’ impacted parts of the country where homeowners have seen well-above average declines in the value of property could benefit from small reductions in principal to help compensate for the larger than normal loss in value.

    5. Regulatory measures governing the appraisal process: While I understand that values of assets can ebb and flow depending on overall market conditions, I still believe it to be unfair that ‘foreclosure’ or ‘bank-owned’ types of transactions are considered when valuing a well-maintained property that just happens to be near an area where the aforementioned types of sales have taken place. It seems to me that if a home is being examined through the appraisal process and is deemed to be in good condition, it is unfair to allow bank-owned and foreclosure proceedings to detrimentally affect the outcome of the appraisal. I submit that this alone has prevented thousands of otherwise qualified homeowners from being able to simply refinance their EXISTING debt.

    As a property owner and a 20 year veteran of the banking industry, I can honestly say that I believe this crisis in the housing industry to be the greatest economic challenge that consumers in this country will face in my lifetime. For what its worth, I applaud your proposal and would greatly welcome the chance to further discuss anything you have seen here. Please feel free to utilize the email addrsss provided with these comments if you wish to talk about anything that I have put forward. I would appreciate the opportunity to talk about anything that could provide relief to the current housing situation.

    Thank you for your time.

    Gordon.

  • Comment by Rick Olson, Saline, Michigan — October 13, 2008 @ 10:27 am:

    I appreciate the thoughtfulness of the “Solution”, and agree with the thrust of it. I agree that the $700 billion TARP may be necessary to unfreeze the credit markets, but it does not solve the underlying underperforming mortgage problem. It will not stop the free-fall of home prices, which is hurting everyone in what Dan Gilbert calls the “death spiral” in the market.

    In the spirit of full disclosure, I come from the Republican side of politics, especially when it come to economic issues. I hate the idea that people who gambled with other people’s money to buy a home they could not afford with the hope that it would appreciate in value and then flip it would be left off the hook. I am one of those 90% of the homeowners who did not take out a risky loan, and who is dutifully paying my loan and other bills on time. Nonetheless, I understand that banks, homeowners and struggling neighborhoods will all benefit if ways can be found to keep people in their homes at payments they can afford. Although I may not like it, I realize that I too could benefit from the Solution by not only stabilizing the housing market but more broadly by stabilizing our entire economy. Until the housing market stabilizes, the economy will not stabilize.

    I perceive that the Solution may need to be improved, however. Many of the troubled properties have declined in value 25-30% (and in some locations, such as California or Florida, perhaps even 40%). If a person purchased a home for $400,000, and owes $360,000 (a 10% down payment loan) that is now worth $300,000, would he/she be interested in a rewritten loan on which he/she still owed $360,000 as in your Solution? I understand the rationale of the Solution of not lowering the loan principal owed by borrowers in trouble, because (1) that would be a red flag to people who are already pushing against rewarding irresponsible behavior and (2) this is a way to limit the cost of the proposed Solution. I fear that feature, however, would discourage sufficient homeowners from participating in the plan to achieve the objective of the Solution.

    In contrast, Stephen Bancroft, the head of the new Detroit Office of Foreclosure Prevention and Response, proposes to reduce the principal in some cases, and that the government would hold a 10-year lien on properties and reap 80% of the gains if home prices rebound beyond pre-slump levels. This approach appears to be more realistic in today’s real estate markets for many homeowners in trouble. This approach, however, raises the questions of:

    * In what cases would the principal be reduced? E.g., would someone who obtained a “liar loan” (by obtaining a loan fraudulently by putting false information on the mortgage application) qualify? I would hate to reward such behavior as it is a clear “moral hazard”. I realize it would require extensive checking of information of every homeowner applying for relief under the proposal which would add a great administrative burden for the program and many disputes.

    * To what level would the principal be reduced? To current appraised value? Setting the appropriate rewritten principal amount is critical, and would need some oversight. With real estate appraisers having signed off on the inflated values of many of the troubled properties to enable a sale, for a fee, are we trust them to fairly appraise the value of the troubled properties now?

    * If the principal is reduced, what happens to the difference between the current loan principal and the rewritten principal amount?

    * Is the mortgage bank (or assignee) holding the mortgage made whole by the federal government? That seems like a bailout to the banks who made these risky loans without regard to the “5 C’s of Credit”. To do so would also balloon the cost of the program to the government.

    * If not, and if the mortgage bank is forced to accept the rewritten loan with a lower principal owed, would the banks be required to participate and have the principal amounts crammed down against their will? If the program is voluntary by the banks, we then have no effective program at all, as the banks can do that now. Might there be some compromise by having some split of the loss, with the federal government taking some of the loss and the mortgage bank taking some?

    * If mandatory on the part of the bankers, how would homeowners who are not in default be prevented from taking the same advantage of the program by simply beginning to miss some payments? Have only those loans in default on October 1, 2008 qualify, might be one way, but then that might seem unfair for someone who struggled to keep his/her mortgage out of default but just could no longer do so on October 2, 2008. Would this legislatively changing the contracts between two consenting parties even be legal without both parties’ consent, or illegal via a “taking a property” barred by the Constitution?

    * Who would supervise this program? With the large number of mortgages needed to be modified, this would take quite an organization or set of organizations, especially if there were mortgage principal writedowns. An alternate proposal would grant a bankruptcy judge the authority to cram down the principal amount in mortgages in default in bankruptcy cases. But, do we want all of these homeowners with troubled properties to declare bankruptcy to gain the benefits of the program? I would think not, and there are not enough bankruptcy judges available to process the number anyway, especially with the slow, cumbersome bankruptcy process.

    A Solution That Works may not have a broad enough effect, but adding mortgage principal writedowns does add many issues, would increase the cost and the administrative burden of the program. Am I seeing the tradeoffs correctly? If so, it seems to make sense to move forward with the Solution as proposed (or tweaked a bit through the political process) and make whatever progress we can make as quickly as possible to stabilize the housing market and the economy.

  • Comment by Steve — October 13, 2008 @ 2:14 pm:

    I have a interest only mortgage that I used to buy my house 4 years ago, my interest rate is already at 6.25%. I am currently $85,000 under water and my mortgage lender is not working with me to write down my mortgage principal. The problem here that everyone is missing is that food, insurance and gas costs increased dramatically over the past 4 years. I can move into a house twice the size in a better neighborhood for less money in rent than what I am paying right now on my mortgage. With a foreclosure I can stay in this house for almost a year and save up all my mortgage payments. I tried to work with the lenders but they just don’t care. Foreclosure is the best option for me at this time.

  • Comment by Verna — October 13, 2008 @ 4:57 pm:

    This debate has been very stimulating. As far as I can tell, “something needs to be done”. With the talk and real issue of rising food prices, gas, insurance, etc., the one central theme that I found missing from the plan is this: CREDIT

    Those 2/28’s, zero down loans were afforded to people who in some cases had credit scores at around 620. How could a viable plan be implemented without taking a look at credit scores once again? If there is a missed mortgage payment then most definitely the score had dropped.

    So my question is this: as to the plan proposed here, how would the decline in a FICO Score affect a person? Will the proposal work for a homeowner whose managed to pay nothing but the mortgage, foregone buying a much needed new car but has gotten behind on credit card payements which ultimately dropped his/her score?

  • Comment by Joel Hersh — October 13, 2008 @ 10:40 pm:

    The Federal Government has bet on the “macro” economic bail out because Paulson is from Wall Street. The main street or “micro” economic perspective is not represented here and shortsighted. Assisting at the local level … which is part of your proposal would be the more logical choice. There still is a lot of fall out that we haven’t seen yet … like municipalities filing for bankruptcy because they cannot maintain the level of services they provide with rapidly declining tax bases. The micro approach would also benefit small businesses that have been adversely effected by the housing market and the credit crunch.

  • Comment by Shirley — October 14, 2008 @ 1:03 pm:

    I purchased several homes during the good years…putting down anywhere from 10-20% on each property I purchased. I was not fooled by the increase in property values on homes, I knew that would’t last. I was more concerned by the fact that the City began raising property taxes on the inflated prices. I am having a difficult time with the taxes. I have seen the decline in the property values but I have not seen a decrease in the real estate property taxes….Hopefully that will change soon…

  • Comment by Kirt — October 16, 2008 @ 11:15 am:

    In example #1, why not just refinance with a current 30-year mortgage at 6.4%? The homeowner took out the loan at 6.5% and made payments for the firt two years. Why can’t they keep making that same payment? Why do we have to subsidize the loan?

  • Comment by E.P. Allen — October 16, 2008 @ 5:49 pm:

    After reading the possible solutions and reading the comments I will try to add my 2-cents of which I believe YOU might think its not worth any more than that, but first about debt and living high-on-the-hog and above your means. I raised financially 4 children by ‘myself’ without owning a house and with a limited education I knew darn well what I could and couldn’t afford. I had good teachers, my Mother and Dad raised 10 children and they sacrificed to pay for a house but never gave in to living above their finances. Laugh if you wish-but here is my suggestions: 1. Our Banks pay for the ‘printing’ of money they get from our so-called FEDERAL RESERVE (which aren’t Federal at all) and they then CHARGE the borrowers (you & me) any % they want from 6% to ?. Is that fair?? You’re lucky if you receive 3% for CD’s, fees for overdrawn account runs from 35.00 to 50.00 daily. 2. In Old Testament Bibical Times every 7 years debts were forgiven. What was good for Paul and Silas, sounds good enough for me. My QUESTION: With all the educated so-called Brain-power in Washington and around the world, why can’t we treat one another with brotherly love, forget fighting, greed, etc. It doesn’t take a mansion to live in, without so much pressure one would be healthier, wiser, more time for our families and when our appointed time for our last breadth, there will be no BRINKS trucks following us to the cemetery. Thanks for reading and PEACE!!

  • Comment by Bea — October 17, 2008 @ 12:50 am:

    Well, this article is well written for a person whom has a lot of time to read…but…What am I to do, being blinks away from loosing the home I was raised in? (I had to purchase it from the estate, since there was no will found, thusly gaining a mortgage.) I am now on unemployment and way behind on mortgage. Actually, foreclosure activity has begun. I am trying to be creative, like turning rooms upstairs into some kind of transitional housing, but don’t know how. I am afraid to continue with the mortgage but afraid to stop. If I stop, I will be forced to rent. I believe that it will soon become a landlords’ world out there. Perhaps they will be lawyers and real estate agents. With more and more people loosing homes, therefor needing rentals, those who own homes will have staggeringly high and unfair advantage. They will be able to pretty much do as they want, ask what they want and buy more buildings which will gain them even more money, to buy more and more. Tenants will be at their mercy, more then ever before. I don’t believe this will take long to happen, if it isn’t already in instances. I repeat, what can I do and NOW? Plans are good but they won’t happen in time to help me. Then I will be resentful of those it would help, as you wrote.

  • Comment by D Elliott — October 17, 2008 @ 1:41 pm:

    Your original plan sounds good. I will share it with my reps and friends.

    There are lots of individual situations out there. Each one can be looked at under these guidelines.

    But Americans need to start living with in our means and not on credit. It seems that we want more and more and bigger and bigger. Let’s be thankful for what we have, learn to live on less, and give more. We still live in one of the richest nations in the world. Maybe you’d rather live in the Sudan or Haiti? We really can live on a lot less than we think. I like what E.P. Allen, back a few a options, had to say; – check it out. Money doesn’t buy us eternity in heaven. That price was paid long ago. It doesn’t cost us anything but faith.

  • Comment by Kimbo — October 17, 2008 @ 3:20 pm:

    I believe that our nation sits upon a precipice of disater with McCain if he were to become POTUS. His people has enacted a dishonest campaign with little to no thought of what his influence might do to our nation and our future. We discussed this at Patriots For Obama earlier today.

  • Comment by R. H. Teruya — October 18, 2008 @ 1:19 am:

    Immigration is the quick no cost answer.

    Allow 20 million foreign U.S. college graduates American citizenship.
    This will increase America’s population with highly educated college graduates and their families, eager to rent or purchase a house.
    This decreases the inventory of foreclosed houses, and increases the demand for new houses, food, clothing ,shelter, furniture, appliances etc.
    The pie will start to expand, quite quickly.
    This can be used to solve quite a number of fiscal financial problems.

  • Comment by msStyle — October 18, 2008 @ 1:23 am:

    The biggest problem with the subprime loans was when prime rates went up interest rates went up. When rates went down the banks did not lower their rates. It wasn’t that people didn’t pay their mortgage they didn’t understand their rates were not supposed to stay consistently high. A lot of these foreclosures were illegal. Unless these banks bring their rates down they shouldn’t be bailed out.

  • Comment by Howard Gibson — October 18, 2008 @ 9:07 pm:

    Sounds like a good idea in principle, but it has gone too far. Now, we need Lyndon LaRouche’s Homeowner and Bank Protection act. We need to freeze the mortgages and have the owner occupants make reasonable rental payments till the market is allowed to settle down. The prices of homes should continue to be allowed to go down. It’s a bubble.

  • Comment by Art Mann — October 19, 2008 @ 10:52 am:

    There are some missing points in the context of this recommendation.

    Most of the troubled mortgages are located in Southern California, Las Vegas, Detroit, Phoenix and Florida. Many of those homes were purchased on speculation or for second homes. Half the homes in the US have no mortgage.

    The culprit here is the 7 and a half trillion dollars that the US sent around the world as a result of our trade deficit which, in turn, was and still is a consequence of our misguided “free trade” policy and failure to achieve energy independence. Energy purchases are half of our seven hundred billion dollar annual trade deficit.

    So what happened to all those dollars? They went into the world banking system with fractional reserves. At a 10% fractional reserve, that money ballooned to at least 50 trillion dollars in new money borrowed and spent.

    Huge demand for US dollar assets was created as a result and the “hyper mortgage” industry was created to fill that demand. Quicken loans is probably looking at having to take back many of the loans that they think they sold under some pretense of fraud or such from the buyer.

    The present plan to put equity into the banks is the best. The solution to this problem is too complex to legislate so let the banks sort it out themselves.

    Where I live, in south eastern PA, housing prices are actually going up.

    But then, we never had a crazy housing price bubble either.

  • Comment by Jacolyn Blunt — October 19, 2008 @ 11:13 am:

    It is so good to know that there are common sense people out there that would agree with me. I have been saying this for months now and people look at me like I have six heads. I was an associate real estate broker for 24 years and retired in Jan 2007, beccause I knew what was coming. I can tell you that many if not most of the people caught in this foreclosure crisis were honest people who could not see what was happening. Most of our buyers were college educated, but had only seen the good times and truly believed the values would only continue to grow. Many thought the growth would be astronomical forever. It didn’t matter what I would say to them. They saw me as old and negative and continued to believe the sky HAD NO LIMIT! We raised them to be positive to a fault, obviuosly!

    We need to do what we can to stabilize the currently unstable loans now before they go into foreclosure, or no one will have any value in their home. Until people feel safe at home they will not feel safe to consume and we will not pull out of this mess. The bailout did nothing but give money to big banks who were not going to do anything but look at positive figures on their books for the first time in a few years and feel good about themselves.

    I know that people hate helping people who were less than conservative in their planning for the future, but if we don’t we, will all be left with homes not worth what we paid for them, not to mention what we spent improving them. I will be sending this plan to everyone I know and my congressmam and senators. Maybe someone will listen.

  • Comment by Dawn — October 20, 2008 @ 2:00 am:

    I think this is a great idea! An actual solution. Mortage companies still make money, the gov. doesen’t spend as much money, and families stay in their homes! What can I do to get this heard by everyone and save millions of people’s homes including my own! God bless you!!!

  • Comment by Bob — October 20, 2008 @ 2:12 am:

    All the plans make good sense. The reality is that the home owners are so far under that they would be stupid to stay with the home. Prices have fallen too far. Give the properties back to the banks that made the bad loans. The banks desire it. The greedy banks are the villains in this case. The Ceo’s of the banks were only looking at their own personal gains. Wall street Ceo’s were right their with them every step of the way for their home run as well. Sadly, too much money for Ceo’s bring excess greed. Why should a Ceo receive excess compensation with no risk for any personal and criminal responsibility. Bad system-bad results.

  • Comment by TE Perkins — October 20, 2008 @ 3:37 pm:

    Dan Gilbert,

    Great minds think alike or at least not afraid to speak out,,,FIRST , I do not know what they were thinking when they changed the GAAP or the accounting standard earlier this year and went “mark to market” . Someone was looking for a big payday or maybe it was meant to penalize the players..but it didn’t quite work out that way. This has to be changed, and can be very quickly…it may stop some of the carnage in investment banking/secondary market. SECOND, your plan to convert ARMs to fixed rates would be the right thing to do for all the reasons mentioned, it is the lesser of two or more evils, some benefit-some don’t, but in the long run,,,it would be the best thing (toughest part is administering the program unless you mandate to all lenders that if certain borrowers qualify, they get it!- then it can be self administered by each lender. Also, initiate an additional NATIONAL help facility to make sure all qualified borrowers get assistance. This plan will have very little gov’t. intervention and allow for more market corrections(capitalism), naturally. THIRD, the SEC has to use more discretion in the oversight of the MBS (mortgage backed security) and all the plays that evolved in that environment (swaps, derivatives, ect….) I am sure Louis Ranieri did not have these vehicles in mind in the development of his idea…..

    Dan, you are correct,,,,,we need to do something NOW. I have served the mortgage industry, working the front line for over twenty years, the industry has treated me well thru its ups and downs but the last two years has been surreal. The $700 billion dollar government deal has brought security and stopped, at least for awhile, the greed and distortions in the market place, but it is not the solution. There will be many solutions needed, but the FINAL solution will be the American public following thru, accepting responsibility where it exists, tightening their belts, and becoming more fiscally responsible in their lives. They need to invest in their futures and become less dependent on today but look and plan for tomorrow(financially)! I wish others pass this on, we need to do more today,,,,,not three months from now when the market greed takes over again. NOW is the time, not LATER, NOW!!!

  • Comment by Tom Leeman — October 21, 2008 @ 11:40 am:

    Leverage, legislation and low interest rates got us into this mess. It’s just that simple
    1st we need to repeal 1999 Gramm leach bliley act and the 2000 commodity futures modernization act next, require all financial institution never to exceed 1 to 10 leverage,
    Mandate by law that all CDO’s and CDS must be
    1. standardized,
    2. be traded on exchanges,
    3. price discovery same as stock or futures,
    4. regulated by either CFTC or SEC
    5. require margin or capital reserve and forced liquidation on margin calls.

    No more exotic mortgages. ( Interest only, no income verification, ARM’s)

    This is the end of credit inflation from this point on many things will change in this economy and nation.
    Greed at all levels drove this from the executives at AIG who knew the credit default swaps were going to implode, to the local real estate appraiser who inflated prices to the mortgage broker who pushed exotic loans to the house flipper who thought there was a greater fool than him. Now it’s time to take our knocks but no one wants to be accountable. When I make a bad investment I suffer the consequences so should everyone who bought an over priced home or condo.

  • Comment by Randy — October 21, 2008 @ 1:10 pm:

    I can see one problem with your original assumption that home construction must cease. I’m not sure you realize how wide-spread an industry the housing industry is. Housing starts are already at a 20 year low and are collecting dust in some areas. That means carpenters, plumbers, painters, roofers, brickers, etc. have no income. Suppliers that depend on new home construction must lay off employees. No need for realtors. No jobs means no income – no money to pay any kind of mortgage.
    I live in an area of the U.S. where home values did not skyrocket with speculators’greed. Yet, we now are breathing the same toxic fumes created by fires on the east and west coast as their money burns.
    There are many areas in this country with healthy economies created by responsible management. Somehow, these areas must be protected from a nation-wide epidemic so that they can help heal this nation. Throwing a blanket quick-fix across the board will end up bringing the otherwise healthy areas down into the mire with everyone else.

  • Comment by Pete — October 22, 2008 @ 12:30 am:

    I write a monthly newsletter and have been in the banking/mortgage industry for over 14 years. I came up with something like this about 13 months ago. In 2003, when the first I/O 100% loans became big and we were building 1 home for every .6 buyers, I noted we were in big trouble. In 2004, I told people prepare for the worst…I was considered Mr. Doom and Gloom…people actually asked me not to send the newsletter any longer. Now, they are coming back with the opposite. Your plan, which is VERY detailed and well explained to those NOT in the industry, is decent and better than what many suggest; however, it’s missing something.
    I will tell you that some lenders, including the bankrupt Indy Mac, are doing this. They are reducing people from 7.25% to 4.5% fixed on a 40year am, first 10 years interest only, and reducing the principal balance…the one thing I didn’t see your plan offering.
    See, lowering the rates is nothing for someone who doesn’t have a stake in this. Make EVERYONE accountable…lower the principal balance to make it more in line with TRUE values so that entire communities do NOT collapse, which will happen and already is. Some DON’T deserve this, but these investors (banks) know who they are. By lowering the principal, they actually KEEP the value of the community up.
    Some of the comments are well put, but some people don’t get it. This is insurance for the 8-12% FURTHER drop that’s projected. And the $225,000 per foreclosure on average it will cost the US. Building has slowed, as one guy put it. If this doesn’t get fixed quickly, it will be VERY bad in 2009 and no recovery is coming soon, no matter WHAT anyone tells you.

  • Comment by Pete — October 22, 2008 @ 12:35 am:

    Actually just read the comment by Rick Olson on Oct 13. VERY well written. Mostly. Good research and info.

  • Comment by Marc H. — October 22, 2008 @ 8:01 am:

    1. If you think now is bad, in the next few years, it will get worse.

    2. Bubbles that burst end in depressions.

    3. The “problem” was caused by mortgages that could not be paid.

    4. That spiraled into defaults and foreclosures, which depressed housing prices because…

    5. Loans have dried up.

    6. Loans have dried up because housing prices are falling…

    7. Q. Who will make a loan using the house as the collateral when the value of the house will be 10 or 20% lower next year? A. No one.

    8. And that is the problem now and in the future. We are in a spiral. It is called the multiplier effect. And the worse it gets, the worser it’s gonna get. And there’s no bottom!

    9. Solution: the housing market must be stablized. And this can only be done by making loans to people… as usual…. no matter what.

    10. Refinance. Create a new wing of the FHA.
    a. It insures mortgages.
    b. It makes loans for residences on reasonable terms.
    c. It turns the spiral of falling prices into rising prices. (Gentle inflation is good!)

    11. When housing prices start to rise again,because the terms are reasonable based on fair market value and market labor rates, then the spiral will be turned around.

    12. And when the fear of the downward spiral is eliminated, banks will lend again.

    13. And next time, if ARM’s are supposed to refinanced in 3 to 7 years, they will be, by the new FHA.

  • Comment by Dori — October 22, 2008 @ 11:34 am:

    Most people will not read this article because it is too long and complex, possibly a shorter condensed version that goes direct to the solution would be better. As I read the entireity of the article, your solution seems to address the problem of defaulting loans; however, not much is said in regards to solving the problem of home values. A key sentence in your solution, reads “home values ‘may’ increase over this period of time”…which still leaves the homeowner in the situation that their house is worth less than what they paid for it, especially if they needed to sell it within a few years (most homeowners only live in their homes no more than 5 years in such transiet States as Florida).

    The inflated values of homes over a rather short timeframe was caused by Investors buying into the real estate market to make a ‘fast buck’ by ‘flipping’ houses, creating a false market to those true homeowners buying a house at an inflated value…the investors ‘jumped ship’ when the ‘bubble burst’, leaving the rest of us to suffer the consequences. Restablizing the home value market is not the same as increasing the homes’ values to meet the homeowners’ original purchase price.

    It sounds like a good plan regarding ‘keeping people in their homes to make affordable housing payments’ but they would still be forced to live in a home they could not sell for enough to payoff the loan.

  • Comment by Pol chomi — October 23, 2008 @ 2:49 am:

    To whom it may concern,
    Very interesting and enlightening articles.We

    should help one another in this time of “Crisis” by petitioning our

    lawmakers to hasten the creation of a law the will stop the collapse

    of the “Housing Market” and to prevent more forclosure.

  • Comment by Jeff — October 23, 2008 @ 12:01 pm:

    As Sam pointed out there is no equity in these houses. Why would anyone want to continue to buy an asset that has declined in value by up to 60%. Would you? They just walk away knowing they can not qualify for another home loan and renting is cheaper. Someone has to eat the bubble…THE HOUSES WERE OVERPRICED.

  • Comment by Gillian Marie — October 24, 2008 @ 1:11 pm:

    There are alot of good suggestions here and everyone is in agreement that something has to be done NOW. There is some help for homeowners facing foreclosure, a program I found out about which is nationwide. It helps people trying to purchase a home, but more importantly, it helps homeowners in trouble right now. It is a nonprofit company called NACA with a very high success rate whereby mortgages are restructured with lower fixed interest rates and in some cases, a lowered principal. The key thing here is to stay in your home, don’t just walk away as you’ll lose leverage. I understand in some cases even if a family has vacated and the home is up for sale under foreclosure, as long as it hasn’t sold yet, there is a chance the original homeowner may reclaim it with NACA’s help. Their website is NACA.com and phone # is 888 302-6222. The program is for people living in these homes and not for investment properties. We need to put aside the anger and help each other. Good luck.

  • Comment by Archidawg — October 26, 2008 @ 12:43 pm:

    If part of the death spiral is a supply/demand thing, let’s also consider buying up the toxic housing stock at absolute rock bottom prices (say ten to twenty cents on the dollar) and simply dismantling them. This would actually (not artificially) reduce the housing stock, thereby stabilizing the value of the homes backed by solid loans. We create a temporary labor industry for dismantling and stockpiling lumber, doors, windows, roofing, etc. (this is all ready an industry, it would simply be able to expand). We then let the free market of home loans learn from their mistakes, and lend more prudently. In time, maybe these homes will be rebuilt. But if not, at least a new bubble won’t be created.

  • Comment by Jeffrey Cullen — October 27, 2008 @ 12:15 pm:

    On September 28th, 2008 I helped my sister Pam call GMAC Mortgage to start a “loan modification”, the process was simple, verbal, no paperwork to full out. She was 2 days from being 3 months behind on her mortgage, a “notice of default” would be filed on October 1, 2008. Her balance on the loan was $670,000, ALT-A loan, with pay options. This home had no problem qualifying for the appraisal to justify the loan, her credit was excellent then, and working in the Escrow business in Southern California, she has taken severe losses in her earnings.

    She never intended to be behind in her payments, and in fact is a very brilliant skilled escrow officer with over 32 years in the business.

    She first however, because of this severe economic downturn, “crisis”, lost her car, all her credit priveledges, and her small Palm Springs condo, because she no longer could afford any of them.

    This very loving, hard working, college graduate, was thus next to be forclosed upon. This is not someone who bought 5 homes, etc.

    Take the time to google “The Money Masters” to gain insight into this entire financial crisis, as it is man-made on purpose.

    On October 17th, 2008, just over 2 weeks later, news arrived contained in a Federal Express overnight letter.

    GMAC took her past due amounts, about $15,000 and placed them into the principal balance, marked the interest rate to 1% fully amortized for 5 years, with an ARM beginning after 5 years, 2.65 over LIBOR.

    Her new payments are $2,533 per month, principal, interest, taxes, and insurance.

    This instantly solved her despair. It maintained not one penny of principal lost. Allows her to steady her home, she is a single mother of two teenagers, and begin the process of “digging out” from this mess.

    This allows for safety to reign in the solution. People in despair do not stay healthy, and can not focus on work, home, and parenting very well.

    So I for one, say mark all the loans to 1% interest rate for 5 years, or even longer.

    But please, before you comment on this matter I have written, go watch the documentary made in 1995 titled “The Money Masters”, and then let me know what you think.

  • Comment by Jeffrey Cullen — October 27, 2008 @ 1:07 pm:

    Who then gets “relief”? I say mandate legal authority to automatically lower all loans of record upon any, and all property in the United States of America, whether they were originated by banks, or private entities, to a 5-year 1% interest rate, fully amortized for 30 years, then go to a fixed 4% interest rate years 6 through 30.

    If the loans have shorter than a 5-year time-frame, then they are by law extended to 5-years.

    Privately issued loans can receive financial compensation for loss of income, clearly less expensive then the ignorance of the current Hank Paulson’s et. al. plans. Also, immediately bringing money to solve our financial crisis from the “bottom up”, instead of having the criminals bail out themselves, leaving all of us the bill to pay going forward.

    This itself, this one mandate lawfully implemented will stop, right now, “STOP” all this nonsense we are all going through.

    You will immediately hear a giant sigh of relief from the entire United States citizenry.

    An excellent financial aid formula can be calculated to give the same financial benefits to renters, and because landlords would be given the 1% interest rate, they too can be part of the financial incentive given to renters.

    For example; a renter is paying $1,500 per month for their home needs, the financial aid would be at least $750 per month direct to the renter.

    This is so easy to implement, the “red tape” of all the individual circumstances is eliminated immediately.

    Within 90 days this would be in full force throughout the United States. Our computerized county records throughout the United States, complete, and exact as to who is the owner(s), and the loan holder(s) on each property.

    Our nations’ ability to again support our infrastructure needs will immediately begin. The local stores, restaurants, sports, and entertainment industry will be again robust. All this will lead to jobs, jobs, and then even more jobs.

    We then can focus our attention to the removal of “The Money Masters”, The Federal Reserve itself, specifically, Alan Greenspan is indeed a fool exposed, as a complete “tool” of the corrupt system, and of course the elimination of the IRS.

    Then, as a nation, we can debate, and vote on any, and all political ideas. Within a free, Republican form of Government.

    When asked what form of Goverment we have, most automatically answer a “Democracy”, then asked to say the Pledge of Alligence to the Flag, they recite; “I pledge alligence to the Flag, of the United States of America, and to the REPUBLIC (!) , for which it stands, one nation under God, with liberty, and justice for all.”

    This a great nation we have, moments from now, we can accept the criminals solutions, or we can discard the criminals, arrest them, subject them to lawful trials, and render judgement peacefully.

    I for one choose PEACE. I support Ron Paul because he supports my beliefs in the good of our nation, supported by the Constitution in place.

  • Comment by Leland McKee — October 30, 2008 @ 1:54 pm:

    You should have proposed this about 18 months ago. The provision for ZERO reduction in principal is too late as over 25% of all outstanding mortgages are upside down by as mush as 50% in some geographical areas. If banks just received a reduction in their debt for mismanagement, then the homeowner should be permitted a reduction too. This is what will stabilize values at the current level and hopefully stop a further eroding of homeowners equity. I see in the near future that federal bankruptcy judges will be permitted to modify primary mortgages to keep people in their homes.

  • Comment by John McLeod — October 31, 2008 @ 10:44 am:

    Leaving the foundations behind would restrict building the same thing again. Salvaging doesn’t allow for utilities and foundations (expensive to clear) roofing would be lost, trusses are hard to store, all the electrical, plumbing, sheetrock, most heating(all rough in), and all the final cosmetics-carpet, paint etc. A completed house is a unit-salvage would be minimal. It seems to me that the builders that built the (extra?) homes should have had a basic understanding of how fast and how many they could move in their area. Individual builders should be accountable for their own actions, over estimate ones market and whose responsibility should that be? This is a banking thing more than a builder thing. It was orchestrated by bank (the federal reserve a private european controlled) controlling money and artificially creating inflation, boom bust cycles.

  • Comment by Brian Johnson — November 10, 2008 @ 11:49 am:

    The main problem with subprime loans is the home owners’ in-ability to make the monthly payments. The majority of homeowners were able to make and many still are making the initial monthly payments. Many of these homeowners would be able to continue to make their monthly payments if they were able to refinance into a standard fixed rate loan.

    There are two types of problem subprime loans, Adjustable Rate Loans and Payment Option Arm Loans (POA’s). The adjustable loans predominantly have 1 and 2 year adjustment periods. Many of these payments have already adjusted up or will shortly. POA’s allow the homeowner to select from 4 monthly payment options.

    80% of the homeowners with POA’s are currently making artificially low monthly payments, opting to add principal to the remaining balance each month (Commonly known as negative amortization). This provides them with the most affordable monthly payment.

    The POA’s are programmed to adjust dramatically at the end of a five year period. The majority of these POA loans are due to adjust in about 2 years.

    There are three obstacles hindering these homeowners from refinancing out of their sub-prime loans. 1) Lack of income to qualify. 2) Current property values. 3) Their lenders inability to help them. Lenders are in a quandary when it comes to restructuring loans for homeowners. In many cases they lack the necessary expertise and/or ability to handle the volume. For most homeowners it’s hit or miss as to whether their lender will allow them to restructure their loan or allow the homeowner to do a short sale enabling them to sell the property.

    When hit with an overwhelming dilemma, one in the likes of which you’ve never experienced before, may require you to re-think the problem and force you to approach it from a different perspective. Perhaps from a direction you’re not accustomed to.

    To help homeowners remain in their homes I suggest a three step course of action.

    First have Congress enact a federally sponsored Mortgage Credit Certificate (MCC). Similar to the program New Hampshire Housing Finance Authority developed twenty years ago for first time home buyers.

    It could work as follows: Each homeowner would get a $6000 annual tax credit which could be used to offset $500/month of mortgage payments. This would enable the homeowner to qualify for a standard mortgage as long as the MCC was granted for at least 3 years. $500/ month equates to over $83,000 more in a loan a borrower would qualify for at an interest rate of 6%. Borrowers would have the option of lowering their withholding on their w4 forms and receive the additional income in their paychecks each pay period. Homeowners would use this to help offset their monthly mortgage payments or receive a lump sum come April 15th. It should last for five years. This will enable homeowners to become acclimated to the mortgage payments. First three years $6,000. $4,000 the forth and $2,000 the fifth and final year. The cost of the five year period would be $24,000. The total cost over 5 years to help save 5 million families from foreclose would be $100 billion.

    Second: Most of the mortgages on these homes are upside down. (Homeowners owe more than the homes are worth). Currently FHA will allow a homeowner to refinance up to 97.75% of a homes value. Why couldn’t FHA expand the FHA Secure program and finance up to 125% of the homes value and charge a higher mortgage insurance premium (MIP). Even if the federal government paid to ensure the entire risk, it would still be cheaper than buying loans back after they become a foreclosure as the government is planning.

    These first two steps should be enough assistance for many of these homeowners to refinance out of their sub-prime loans.

    Third: If needed the homeowner’s current sub-prime lenders would now be in an enhanced position enabling them to reduce the balance of the sub-prime loan down to 125% of the homes current value making it possible for the homeowners to complete a refinance.(example: current sub-prime loan balance $300,000 current home value $200,000, 125% of current value =$250,000. New loan would be $250,000, sub-prime lender would write off $50,000)

    Homeowners would regain control by knowing up front the necessary steps involved in which to re-finance rather than having to wait for an over burdened hit and miss loan mortgage servicer who may or may not approve the restructuring of their current loan. Homeowners get to stay in their homes and the tax payers would make out much better on their current investment of $700,000,000,000 (700 billion).

  • Comment by Shiv Bansal — January 30, 2009 @ 5:04 pm:

    A simple solution will be to buy partial equity in the homes of troubled borrower – Example: Mr A has a 200K loan on a home, bought for 200K. His monthly payment is 1200 which he can not afford now. He can not sell the house in today’s market.
    Govt. comes in and is ready to buy 50% equity in his house at an economic value which they asses say at 150K. They pay Mr A 75K and allow him to occupy the complete house rent free for next few yrs. He repays a part of the loan using $75K from the govt. and new payment is $700 which is affordable. Now borrower is happy as he gets to live in the same house at half the monthly payment. Lender is happy because exposure is reduced and there is a greater chance that borrower will make his payments current. Govt. is happy because they invested in real estate at economic value and there is a chance that investment will appreciate with time.
    In the above example a $75 billion investment can help 1 million families.

  • Comment by Jack Scott — August 22, 2009 @ 8:27 am:

    While I applaud this approach, and it’s a savvy one, it only solves part of the mortgage crisis. There are now 7 million new Americans unemployed over the past year. It’s only going to get worse. Those unemployed who own homes can’t stay in them because they have no income. In addition, there are now 9 million Americans working shorter work weeks because consumer spending is off by $500 billion over the past 12-months. Consumers aren’t spending because they are scared of losing their job, they don’t feel “wealthy” anymore because of the decline in housing prices, and the stock market decline. The jobless can’t spend because they have no income. The “partially” employed can’t spend as much because they don’t make as much as they used to.

    The economy needs a 1-2 punch to fix it.

    First punch, we have to get Americans back to work by stimulating the economy. See http://www.stimulate-us-now.org to do that. It would take $700 billion from the pool of unspent TARP funds ($328 billion), the current stimulus plan ($590 billion uncommitted and unspent), and $800 billion bailout funds that are sitting idly at banks waiting for the next crises, and put it directly into consumer spending, which drives 70% of our economy. Every American 18 and older would get a $3000 prepaid credit card which must be spent in 6-months, because the card would otherwise expire. Consumer spending creates jobs, jobs create consumer spending, and both generate tax revenues.

    Once we stabilize the economy and get millions of Americans working again, we do the second punch and implement Dan’s plan. Give Americans a chance to even pay a mortgage with the SUN Plan, and then find a way to make their payments meet their budgets.

    I guarantee that this would work!

    Dr. Jack A. Scott
    Small Business Owner, Cavs Season Ticket Holder and Concerned American Citizen
    http://www.stimulate-us-now.org

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