Posted on June 26, 2011

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Housing Bailout – Simple Solution with No Government Funding

I just saw on Fox News that the government is considering another homeowner bailout utilizing more than a billion dollars – YOU’VE GOTTA BE JOKING!  First and foremost, the homeowner bailout measures already taken by the government DID NOT WORK and cost taxpayers billion.  In fact, any bailout measures in which the government simply tries to throw money at the problem only worsens housing problems.  Any measures to delay foreclosure processes only serves to prolong and deepen the problem.

I understand this is a matter that affects Americans from all walks of life, political views, and income classes.  I have many friends and families who have suffered or who are suffering from the negative consequences from the housing collapse.  Nonetheless, it is a matter that needs to be dealt with correctly and it will be painful for many. 

Current Problem

Many people facing foreclosure are not those who are not making their mortgage payments because they can’t afford to do so; many are those individuals who are choosing to not make their mortgage payments because their home values are significantly underwater (i.e., the outstanding mortgage balance is greater than the value of the home in today’s market).  In other words, it makes more financial sense to simply walk away from their homes to avoid losing any more money on a bad investment.  However, because of the government’s interference in the market thus far, the foreclosure processes are being significantly delayed, even though many homeowners haven’t made their mortgage payments in over 8 months.  The result of which are homeowners who are not in financial distress living rent or mortgage payment free in their homes for long periods of time, all while the government expects the rest of taxpayers to bail everyone out.  Government intervention in this sense is Un-American and creates financial injustices.

On the other hand, there are those who simply cannot make their mortgage payments any more due to financial distress resulting from unemployment or from a higher reset in their mortgage rate because their homes were purchased with an adjustable-rate mortgage feature.  Although this is unfortunate, these are risks that these homeowners accepted and the consequences related to their decisions must be faced without government intervention.  Many believe otherwise and blame “predatory lending” or the big bad banks.  However, at the end of the day, the homeowners had a decision and they need to accept the consequences of those decisions.  For those who do believe they should somehow be bailed out of their mortgages, would you also support a bailout of investors who collectively lost billions or trillions of dollars in the stock market during the crash in 2009?

Had the government not intervened in the housing market by throwing taxpayer money into the process or taking steps to further delay foreclosures, home values would have bottomed quickly and banks would have been able to quickly clear out foreclosed homes, albeit momentarily painful for homeowners losing their homes.  The result to other homeowners would have been a faster recovery of home values and fewer homeowners entering the foreclosure process simply because they want to walk away from their undervalued homes.

Where to go from here – my proposal

The democratic government could swallow their pride and recognize that taking money from all taxpayers to bailout a small portion of individuals’ bad financial decision is not just and that government intervention in free-market economies doesn’t work and let the markets resolve the problems.  The result of this would be a painful, yet quick resolution.  Or the government can keep up with their ineffective, unjust re-distribution of wealth policies and further delay a recovery in the housing department. However, it appears for political purposes Democrats would like to continue their destructive and fiscally irresponsible policies to further delay the recovery in the housing market.

If the government does want to intervene, I have simple idea which does not require taxpayer money.  The basic premise is this – either the homeowner accepts the foreclosure process and banks repossess the home without further delay to sell on the open market OR the homeowner enters into a new agreement with the bank where the homeowner’s mortgage debt is adjusted downward to the current fair value and in which the bank has future upside when the home is eventually sold.  Here is a specific illustration of how this would work if the homeowner decided to stay with the house under new terms.

1)      The current fair value of the homes for which the homeowners are delinquent on their payments is independently valued at the cost of the bank or the mortgage holder.  Let’s assume the home is independently valued at $150,000 and the amount currently owed on the mortgage is $250,000.

2)      The homeowner accepts a new 30-year mortgage agreement with a principal of $150,000 at the previous fixed interest rate.  If rate was not previously fixed, the bank and homeowner agree upon an appropriate fair market rate.  The homeowner continues to own the home and makes the mortgage payments based on the new agreement. 

3)      Also as part of the new mortgage agreement, when the homeowner eventually sales the home or refinances it in the future, the bank has the right to recoup its initial mortgages losses plus interest.  In other words, let’s assume the homeowner sells the home in 10 years for $300,000 at which time $120,000 of debt is still on the home.  Of the $300,000 of proceeds, the remaining debt of $120,000 is first paid to the bank, leaving $180,000 to be distributed.  Second, the bank receives back its $100,000 ($250,000 – $150,000) it lost on the mortgage modification, plus some previously agreed upon interest (let’s assume $30,000).  The remaining $50,000 ($180,000-$100,000-$30,000) is distributed to the homeowner.

From the homeowner’s perspective, the modification allows them to stay in their home and permanently reduce their mortgage debt and mortgage payment to an affordable level.  From the bank’s perspective, the debt is modified to the same value they would get for the property if they were to repossess and sale the property, yet they also obtain the potential opportunity to recoup some or all of their losses when the property is sold in the future after the property has appreciated.  

Conclusion

Obviously there would be many details to work out in such a plan, but overall, it would be an acceptable proposition to banks and a plausible positive option for homeowners who want to remain in their homes.  Additionally, this would allow the banks to eliminate the extremely large quantity of homes in foreclosure and help the market to clear out the excess home inventories.  Most importantly, this solution would not require any taxpayer money.

Democrats may push for further housing bailout funding at taxpayer’s expense to improve their political position (i.e., that they are taking measures to help desperate homeowners’).  House Republicans will obviously vote against this measure given the debt crisis America is facing.  However, to avoid the appearance of “not doing enough to help homeowners,” Republicans should propose their own plan to help homeowners without using taxpayer money.  A plan as I have proposed above is definitely an option!

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Posted in: republican