Thursday, February 26, 2009

My mortgage relief/bank recapitalization plan

Let’s say you have a house.  The value of that house has either stalled out or fallen.  If you already have a traditional 15 to 30 year home mortgage or you have one of those “exotic” or sub-prime loans but can still afford the note you purchased even if it was a traditional 15 or 30 year loan, you’re the type of homeowner that will benefit from my mortgage relief and bank recapitalization plan (MRBC, yea, that’s nice).

People with investment properties they can’t afford, sorry, but I’m not interested in helping you.

Vacation homeowners?  Sorry, figure out how to bail yourself out.

People with waaaayyy too much house, as defined by the percentage of your income it would take to service a traditional loan, sorry, you made a big, dumb mistake buying too much house, the bank made a mistake giving you that loan, and you’re both going to have to pay for that mistake.


How will I fix it?


The people who can afford their home notes right now will be able to go to the bank, fill out the refinance paperwork to get a new note at today’s rates, and the bank that gives that loan will receive a payment equal to 20% of the note being refinanced, up to a certain dollar amount.  That 20% will then be fully applied to the new loan, effectively knocking 20% off the principal of the note.  This is NOT free money.  This is a grant which rewards certain, desired behavior.  A payment for a service, if you will.


It is also an acknowledgement that the value of the underlying asset (the home) has been compromised by all of the people defaulting on their adjustable rate loans and the resulting flood of foreclosed homes at low, low prices.  Because the value of the underlying asset has been compromised refinancing has become hard to do, even if you have decent credit, because the value of the asset has been compromised and the equity position of the home has been reduced.  Consequently, assuming you’re at or near $0 on your equity position, the 20% value grant will allow you to completely refinance your home to a traditional mortgage without taking an additional monthly PMI hit.  You still have to pay closing costs.  You still have to be able to afford your home.  The principal portion will simply be 20% lower (up to a certain dollar amount).  Meanwhile, the banks have taken certain suspect notes off the books by refinancing the “good” homeowners who have “bad” loans, and meanwhile allowing the “good” homeowners with “good” loans to refinance their loans at today’s excellent rates.  This shores up the cash position with extra fees, the cash grant, and a more predictable stream of payments from the loans (nobody really knows what a potentially non-performing bad loan looks like, they look just the same as a “good” bad loan) and can begin the purging process of the remaining loans held by people who cannot afford their houses.  It draws a distinct line in the sand between bad homeowners, good homeowners getting swept into the tidal wash by the bad homeowners, and the traditional mortgage holders who didn’t cause this mess to begin with.


I’m pretty sure it would work.  But it’s too simple (and logical) to ever pass the brain trust in DC.


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