Posted 10 years ago on Dec. 4, 2011, 2:56 p.m. EST by puff6962
This content is user submitted and not an official statement
OK. Let's look at the big picture. The problem in the housing market relates to two things. Unemployment and the fact that home prices have fallen.
The fall in home prices means that a 100k house purchased in 2006 may only be worth 70k today. In other words, the home is underwater 30k.
Now, that buyer cannot refinance, and take advantage at historically low mortgage rates, because the bank will only loan 70k (actually, they are likely not to even loan that as they want 20% down against the current home value). But, anyway, assume that the bank will only loan 70k.....
The homeowner is screwed and can't stay in the home--despite having a job and a history of making his payments--because there is a 30k shortfall in what the bank will lend. Should the owner just walk away? Many are.
It is likely that home prices will rebound somewhat as the economic recovery crawls along. But, if the buyer above can't stay in his current home....despite being gainfully employed.....the deflationary spiral in home prices will continue and foreclosures will line every street.
The answer must address the 30k amount that the home is underwater and the only way to do that is if the government takes a more direct role in providing financing.
What I would propose is that the government make available to qualified borrowers a secondary loan in addition to the normal conforming mortgage amount of 70k. This 30k would be provided at the prevailing rate and the government would subsidize interest payments for a period of 2 to 5 years depending upon the homeowner's financial status. This secondary loan would be backed by the government and could not be factored into the debt ratios considered by lenders when making conforming loans.
Now, this loan would follow you and would not be fully eligible for dismissal in any future bankruptcy. It is a loan that will tide the homeowner until better times arrive and their negative equity becomes positive.
When that occurs, another mortgage could be written for the 100k total and the government then repaid.....or the buyer could just continue to make two payments. (One to the 70k conforming loan and one to the 30k government loan).
This system would allow people to remain in their homes, refinance at the best rates they will see in their lifetimes, and would not punish those who were conservative during the boom and who are doing fine in making their current home payments.
Some people can afford their home payments and have already refinanced. That's great. Others are so far underwater that foreclosure in inevitable and we need to make sure that there is a safety net for them.
But, this program is intended for the vast middle....those who are underwater to the extent that they may loose their home, but who cannot refinance so as to reduce their home payment. That is the line where the deflationary spiral in home prices must stop. These individuals may have bought at the peak of the market, but they love their home and can....with a little help....remain.
In the end, this program will help us all simply because, when my neighbor is foreclosed upon, my comp. home value is crushed. That foreclosure sale mayl drop my home value by as much as 10-20%. So, it's a worthy investment for government to intervene in an aggressive manner and to prevent this cycle from continuing.
It will benefit all while not punishing anyone.