SOLVE THE HOUSING CRISIS

The Warren Plan
On October 9, 2008, I offered my suggestion to assuage the tremendous housing deflation problem which our nation faces, the real epicenter of the extended economic recession (?) which continues to grow daily. According to the National Association of Realtors, the median home price nationwide in February was down 12 per cent from one year ago. But declines of more than 30 per cent were found in California, Michigan, Arizona and Nevada. The biggest drop, more than 50 per cent, was in Ft. Myers, Florida. We can argue among ourselves as to whether tax dollars should be used to help some who made extremely unwise financial decisions, but meanwhile the house burns down around us.
My solution was for the government to actually use tax dollars to reduce troubled loan principal up to 20 per cent, provided the lender in control would voluntarily cut the interest rate, make it a fixed rate, and extend the term of the loan, to bring the monthly payment down to around 31% of monthly income. In the past, this front end ratio was always used for loan approval; but was combined with a back end ratio of 38 per cent, when all other monthly household credit obligations were included.
Unlike the Obama plan, the government would be secured in most instances under my plan. The distressed homeowner would have to give the government a second note and security deed for the amount of aid tendered, payable no later than ten years, or upon sale, if earlier, with 3 per cent simple interest to accrue. According to economists, the national inflation rate from 1970 to 2000 was about 5 per cent per year. Thus, in ten years, with the recession stopped, we should expect a 50 per cent increase in home values from today. If, in the unlikely event the home value had not increased enough to pay the entire government debt upon sale, the excess balance would be forgiven. If my math is correct, $700 billion, which made up the original TARP, would have funded up to $83,400 principal reduction each (20% of the $417,000 Fannie Mae nationwide maximum loan limit) to as many as 8,400,000 homeowners. I don’t think that many are in trouble, and further, most don’t need that much relief. According to the Washington Post, less than 3 million mortgages are now past due. If we relieved only 3 million homeowners, the original TARP would have funded up to $233,000 principal reduction each.
Instead, the Obama plan calls for the lender to eat the principal cost of getting the front end mortgage ratio alone down to 38 per cent of monthly income, and the government will eat the principal cost to bring the front end mortgage ratio alone down further to 31 per cent of monthly income. (Think of all the accounting jobs we will create.) All other household debt, the back end ratio, will not be affected. (Expect another plan later to handle that.) The loan servicers will get a flat $1,000 bonus for every loan which they renegotiate, and another $1,000 per year for three years if the borrower remains current. The lender gets a $1500 bonus, and the servicer gets another $500 bonus, if they renegotiate prior to a delinquency. In addition, the borrower gets a $1,000 annual bonus for 5 years if he makes his payments, and does not walk away.
Finally, the Obama government is injecting another $400 billion into Fannie Mae and Freddie Mac, the former government-sponsored mortgage buying enterprises which are now government owned mortgage buying enterprises. This new $400 billion would fund another 1,716,000 homeowners with $233,000 up front principal reduction. But, regretfully, my solution would not substantially grow the bureaucracy, nor would it pay the greedy lenders who initiated the problem, so it is out of the question. Furthermore, it is just much too simple to come out of the federal government.
Soon, I will be circulating a petition to elect me lifetime benevolent dictator of our nation. If you are willing to sign, please let me know.