Holidays for the Home

With 4.4 million non-conforming American home loans (subprime, but also including the larger, “jumbo” loans) approaching 60 days or greater delinquency levels in the near term, and with average value of those loans, according to an article released on CNBC.com (December 18), hitting around $200,000 and the underlying average appraised value falling to $183,300, that creates an average underwater value loss of $16,700. We can work with that.

CNBC reported the frustration of angry Congressmen and women at the government’s relative lack of providing what appears to be an obvious need stem the foreclosure tide that is tanking the value of innocent homeowners who did not borrow without the means to repay the debt: “ ‘You don't have a comprehensive plan to deal with foreclosures,’ lamented Rep. Maxine Waters , D-Calif., echoing widespread anger and disappointment over the Treasury's execution. ‘Please don't come here and ask for another penny,’ she told [the governmental Troubled Asset Relief Program boss, Assistant Secretary of the Treasury for Financial Stability Neel] Kashkari…

“Waters recently introduced legislation calling for $24.5 billion in foreclosure modification and prevention to be funded under the TARP, based on a plan developed by FDIC Chairman Shelia Bair… The goal is to modify half of the 4.4 million non-[conforming] loans expected to become problems in 2009. Based on a 33 percent re-default rate, 1.5 million homeowners would be spared foreclosure… Under the plan, the government would pay companies that service the mortgages $1,000 for each modification and share up to 50 percent of any loss if a modified loan re-defaults.”

My own suggestion, presented in earlier blogs, made the following proposal (which would require Congressional authority), which might actually be more effective (with an additional modification to cover those ARM loans that are about to come due):

1. When requested by the relevant homeowner, originating banks or their successors would be required to review individual loans for people for whom they issued a mortgage (even if they sold the loan to a third party), but only as to owner-occupied residential property. Maybe the above $1,000 fee can apply to pay the banks for that service, bourne by the government. Any company that bought the loans or aggregated them would be bound by the terms renegotiated by the originating bank, but to the extent of underwater payments (see 2 below), the actual current lenders would receive the relevant benefits.
2. Subject to a verification by the originating bank that the subject homeowner has the means to make the requisite monthly payments (i.e., apply a reasonable loan application process) and an actual appraisal of the home or the application of a more generalized fraction of depreciation of nearby home values (zip code or sub-zip code analysis, which is even available online), and subject to a federally established interest cap (6%?) and a loan period of no less than fifteen years and no more than thirty years, banks would have the right to require that the federal government fund 100% of the amount that the value of the home is worth less than the current mortgage. We’d actually use some bailout funds to make those payments, but taxpayers would not be punished under the next point, and we wouldn’t be funding folks who would inevitably default anyway.
3. A new loan would then be substituted at the lower appraised value and the new interest rate, the government would get a right to a percentage of the sales price (not to exceed 15-20% of the total, and only to the extent of any appreciation), if and when the property is ever sold. The fraction could easily be determined by applying the underwater amount under the old loan against the new appraised value.
4. Adjustable rate mortgages (ARMs) would be subject to separate set of standards: (a) there would be an interest cap (6%), and (b) provided that the homeowner were not delinquent or were otherwise proven qualified to make the requisite monthly payments, if the term of the ARM were set to expire within the next three years, presumably with a balance to be repaid as a balloon payment, the term would automatically be extended for an additional five to ten years depending on the loan amount.

Hey, we’ve got to get this nation back on track! For the people who make up this economy!

But wait, there is another plan out there, which is being offered by Credit Suisse (a global financial giant) as a Christmas bonus to its executives, according to the December 18, theDeal.com: “Credit Suisse may have finally figured out a way to curb the risk-taking behavior of its senior employees ... by giving them bonuses in the form of $5 billion of the toxic mortgage-backed assets that lie at the heart of the credit crisis. … The deal actually works out well for both the Swiss bank and the employees, since the risk from the $5 billion in assets no one wants is moved off of Credit Suisse's books, while the senior managers who might not have received anything considering the state of the bank, get something ... which… is better than nothing (and certainly shouldn't prompt the public outrage of giving cash bonuses).”

I’m Peter Dekom, and I approve this message.