Solution for the Foreclosure Crisis
Filed Under Foreclosure Homes | 2 Comments
Stephen F. Thode of Lehigh University suggested a solution to the sub prime mortgage crisis.
A $700 billion bailout has been suggested for distressed institutions. The money should be distributed in the following manner. A decade ago, the nation faced a savings and loan crisis. Due to this, the federal government formed the Resolution Trust Corporation. This organization bought out mortgaged commercial property. Then they auctioned these for whatever price was offered. As a result of this process the real estate market recovered pretty quickly. The tax amount was much less than estimated.
Today, a similar method should be followed. A new organization, should purchase repossessed or mortgaged property and offer the distressed a new offer. In exchange for their houses’ deeds, the organization would pay off all the house dues including mortgage, due property taxes etc. The home would be rented to the owner at a price, less than the current mortgage amount, under a 12 month lease. However, the decision would have to be taken by the owners quickly.
The property would then be auctioned off to the highest bidder. It would of course be necessary for the highest to put 5-10% cash at the end of the auction and escrow a year of anticipated property taxes. The winning bidder would take on the current mortgage. This would let the new owner arrange for permanent financing from his own private sources and finally the loan is paid off.
This process would yield positive results. One can hardly find fault with it. The foreclosures are brought to a halt. Many victims of the foreclosure crisis avoid further bankruptcy. These victims would still have a roof above their heads – even if it were as a renter, not a home owner. Further more, all property taxes are paid off. Crises is avoided in school districts, municipalities etc. All property values are decided again. These new values show them as rental properties. The most important thing, the much needed assistance is directly to the distressed victims, not Wall Street fat cats.
Residential property values would recover. Even the auctioned property would help in property taxes.
There is a reason behind the failure of the sub prime mortgage situation. It is definitely not because ownership by comparatively less creditworthy borrowers is a negative thing. It is because the huge rise in demand that was created caused housing prices to rise to dangerously high levels. These levels were definitely not sustainable.
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2 Responses to “Solution for the Foreclosure Crisis”
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An excellent solution. My only concern would be the part about “This would let the new owner arrange for permanent financing from his own private sources and finally the loan is paid off.”
Given our current liquidity crisis it may be difficult for the new owner to obtain financing. It appears the banks are sitting on the capital injections from the Federal Reserve.
Here’s an alternative.
Have a government sponsored loan available for every homeowner up to $100,000 – provided the outstanding mortgage is more than $100,000. The loan would be available at 0% interest plus the rate of inflation.
The catch is that the loan would be personally guaranteed and would survive foreclosure and bankruptcy.
As part of this deal the lending institution would agree to reset the balance of the loan to the prime rate.
The $100,000 would go to the bank to pay off part of the mortgage.
How much would this cost? Well we have 70 million homeowners and 50 million with a mortgage. Since this isn’t limited to subprime it may be that all 50 million would take advantage of this offer. However, those who have a lower
interest than current prime probably wouldn’t take advantage. Also those who have nearly paid off their mortage probably wouldn’t take advantage.
Let’s say 50% of of the 50 million homeowners take the government up on the deal. That would cost $2.5 trillion.
Three thoughts on that $2.5 trillion.
First it would immediately solve the liquidity crisis because it would flow back into the banking system immediately.
Second, since the $2.5 trillion would be a loan it would eventually be repaid.
Third, the original value of the mortgage wouldn’t change. This is an important point. Only those people who truly want to keep their homes would take advantage of this plan.
There’s no uncertainty of how to value the bad loans.
There’s no buying distressed loans.
There’s no threat of the bailout causing housing prices to spiral downward like the existing plan.
What’s wrong with buying the distressed assets?
You can’t reasonably value them. If you pay too much the taxpayer doesn’t get their money back. If you pay too little you cause downward pressure on housing prices.
If you don’t like the $2.5 trillion price tag then you could limit it to only those homeowners with subprime loans, or only those with credit scores below a certain number, or only those with ARMs, etc. etc. etc. There are many ways to limit the $ cost of this type of rescue plan.
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