Categorized | If I Could I Would

How To Fix The Housing Market In 90 Days Or Less

I think we could fix the housing market and have it back on track in less than 90 days. The problem is that the banks don’t want to do anything and the government won’t take a stand and make them do anything. The money that the banks received in the bailout should have been used to bailout the homeowners. It’s still not clear what the banks did with all that money. But this is my plan to fix the housing market in 90 days or less:

First lets define the basic problem.

1. We have a lot of homes with mortgage loans that exceed the actual value of the home (which is called being underwater) and most of the loans are set at high interest rates. Some homeowners continue to pay their loans but many homeowners have stopped paying and are in foreclosure.

2. We have a lot of homes that are vacant or abandoned.

3. We have a lot of homeowners that would like to refinance but can’t qualify for a new loan.

Below are three basic steps to solve the underwater homes problem.

1. Do an appraisal on every home that got caught in the housing bubble and establish the current market value.

2. Mandate that banks refinance the underwater mortgages at $5,000 below the current market value of the home. (This will instantly give the homeowner $5,000 in equity.)

3. Give the homeowner a prime interest rate regardless of credit score.

This would accomplish several key things:

A. If the home is in foreclosure, the homeowner could stay in the home and start paying a mortgage that matches the value of the home. One of the reasons many homeowners stop paying is because they feel they’re just throwing away money on an underwater mortgage at an interest rate that’s way too high.

B. If the home isn’t in foreclosure, the homeowner would get a fair mortgage at an excellent interest rate. The lower payment would free up funds that the homeowner could spend and help to grow the economy.

C. In either case the $5,000 would represent instant equity in the home and give the homeowner a little bit of swagger and the incentive to keep up the payments.

D. Split the underwater amount in half. One half will be simply erased and forgiven. The bank would write-off the other half in the traditional fashion and the homeowner will claim it as income on an IRS Form 1099 and pay taxes on it over a four year period.

So if the underwater amount is $40,000 dollars, you would toss out $20,000. The bank would write-off the other $20,000 and the homeowner would receive a Form 1099 and pay taxes on the $20,000. The homeowner would have the option to spread the amount over four tax years.  In this particular case the homeowner would claim $5,000 as income for four years and pay about $1,000 in taxes each year. That would be a small price to pay for a mortgage at $5,000 below the market value of the home and a prime interest rate regardless of credit score.

E. The banks would start generating positive cash flow and get away from the expense of dealing with all the foreclosures.

F. If the homeowner sells the home within three years they have to split any profits with the bank.

What do we do about vacant homes?

The only way to solve this problem is for the banks to get away from the rigid credit score requirements and give qualified buyers a mortgage loan. The banks went from being too lenient to being too stringent. There’s a middle ground and they need to find it. The government could also purchase some of the homes and use them for military housing. Military housing doesn’t necessarily have to be on a military base. The key advantage to military housing is that its rent free. We could also give some of the homes to disabled veterans that served in Iraq or Afghan. Would anyone have a problem giving a vacant house to a combat amputee? I don’t think so. That’s what I call supporting the troops.

How do we help homeowners refinance?

If the home is not underwater the reason the banks won’t refinance is totally due to greed. Because if a homeowner is already paying a $1,500 mortgage with no issues then he could certainly pay the $1,100 mortgage he would get at a lower interest rate. So the bank is essentially saying, we trust you to pay us $1,500 a month but we can’t trust you to pay us $1,100? Wow really!

The banks refuse to refinance because they don’t want take the revenue hit. So they’re lying their butts off and blaming it all on credit scores and new regulations. But that’s not the case at all. Greed is the only thing that’s keeping banks from refinancing a home that’s not underwater. The banks are trying to make as much money as they can so they have no incentive to refinance a loan that’s being paid on time.

The only way to get it done is to allow Fannie Mae and Freddie Mac to refinance any mortgage loan. Right now they can only refinance the loans they originated. But if we pass legislation that would allow them to refinance any loan, it would help to solve the problem. It may be tough to get the legislation through Congress but I think just the threat of it would be enough to scare the banks into action. If the banks think they will lose the loans they may change their mind about refinancing.

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