FINANCIAL CRISIS SOLUTION--Mortgage Payment Savings Accounts

General Real Estate Investing
1

For what it’s worth…here is my plan to fix this mess. Any thoughts?

MORTGAGE PAYMENT SAVINGS ACCOUNTS:

OVERVIEW:

A. AMERICANS WITH PERFORMING FIXED-RATE MORTGAGES:

Create a blanket rule requiring that all banks (wanting/needing government funds) form a savings account for each PERFORMING mortgage in which 25% of the monthly mortgage payment will be redirected INTO A SAVINGS ACCOUNT for three years for that individual/family/investor.

The bank would then qualify for 60% of the value of that account in government “rescue” funds plus 5% to fund interest on these savings accounts which go right back to the taxpayer. (NOTE: I have a basic understanding of accounting principals. Someone better versed with balance sheets would need to look further at the accounting aspects of this plan– BUT THIS PLAN CAN BE WORKED OUT TO BE VERY FAVORABLE FOR A BANK’S BALANCE SHEET).

Example:

Mr. Smith pays $1,000.00 per month in principal and interest to XYZ Bank. The bank will apply $750.00 to off-set income and apply $250.00 to the savings account. After three years, Mr. Smith has $9,000.00 saved in this account plus 5% annual interest earned $450 for a total of $9,450.00 which makes Mr. Smith very happy. This also gives Mr. Jones more purchasing power and he is more likely to continue spending money.

While the bank takes an initial loss on the income of $9,000.00 it is okay because that bank then could make a loan of $27,000.00 (using the old 3-1 leveraging rules) because of the increased deposit funds. Additionally, the government rewards this practice by supplying the bank with a loan that is 60% of that account value, $5,400.00. This allows the bank to fund business and grease its lending wheels. It also shores up investor confidence since the accounts are directly linked to customers paying the mortgages.

B. THE SOLUTION FOR AMERICANS WITH VARIABLE-RATE, NO DOC, NO DOWN, LIAR-LOANS STRUGGLING WITH PAYMENTS:

The banks are required to write-down the mortgage principal 20% and create a fixed-rate mortgage at prevailing rates for that homeowner. The homeowner then has 2 options:

  1. Savings account with 1.5% rate increase: Apply 25% of payment to a savings account for 3 years as mentioned above. After 3 years, the interest rate will increase 1.5% and then will be fixed for the remainder of the loan.

Example:

Ms. Jones obtained a mortgage for $400,000.00 with 0% down. The home today is worth $200,000.00 and she is struggling with her $2,500.00 payments. Under this plan, the bank writes down the mortgage to $320,000.00 with a fixed-rate 30 year loan at 6%. For three years her P & I payments are now manageable at $1,900.00, 25% of which is moved to the savings account. After 3 years, Ms. Jones has approx. $18,000.00 saved and the bank has been able to loan $54,000.00. By increasing the interest rate by 1.5% after 3 years, (approx. $300 more for Ms. Jones) the bank can recoup some of the loss and the bank has avoided a foreclosure.

  1. Payment reduction with 3% interest increase: The homeowner is allowed to pay only 75% of the mortgage payment for 2 years. After 2 years, the interest rate will increase 2% at which point the owner will be offered these 2 same options again. If the savings account is selected, 25% of the payment would be transferred into the savings account for one year. If a reduction in payment is selected then an additional 1% in interest would be added to the mortgage after the third year then 100% payment in full is required and would be fixed there-after. This homeowner would have their credit capped during these 3 years to avoid irresponsible spending.

FURTHER PLAN DETAILS:

  1. Savings plan transfers 25% of ALL non-commercial mortgages. Includes primary, secondary and investment properties currently in existence and acquired through December 2010.
  2. Savings plan extends to any conventional mortgage created through 2010 to promote new home purchases and free up bank inventory.
  3. Banks are required to follow strict lending guidelines for its borrowers (reinstate the old, effective guidelines).
  4. Bank guidelines would allow for 10% down to keep home values from falling further

OTHER CONSIDERATIONS:

  1. This plan is very basic and needs to allow for other variables since this is a very complex issue
  2. A knowledgeable accounting professional needs to consider the balance sheet adjustments
  3. Requires new GAAP rules

THE MORTGAGE PAYMENT SAVINGS ACCOUNT PLAN BENEFITS:

  1. Limits government involvement
  2. Allows the free-market to ultimately solve the problem with the banks bearing some of the burden
  3. Forces Americans to save money
  4. Allows Americans to feel comfortable spending the extra money they may bring in
  5. Gives Americans incentives to purchase homes
  6. Allows banks to issue more loans
  7. Restores main-street and investor confidence in our economic system
  8. Allows owners of investment properties to decrease rents during this difficult economic period
  9. Avoids unnecessary and costly appraisals
  10. Promotes job creation within the banking and real estate sectors
  11. Creates a built-in system of incentives, over-sight, cross-checking and accountability
  12. Allows time the next economic expansion to take hold, create new jobs and return a sense of prosperity directly to main-street Americans

If you got this far…thanks for reading!!!

2

First off, thanks for proposing a solution.
I just did a very quick read. The one thing that really stood out to me was in part B for the mortgage write-down. I’ve heard lots of people mentioning something should be done along these lines. Here’s something to consider. If the disparity between the mortgage amount and the home’s market value is as great as it is in this scenario, we’re still going to have home owners who just decide to walk away from it because of the large disparity. It’s going to take a Mrs. Jones who is VERY dedicated to saving her credit in order to keep paying on a mortgage for something that’s worth $120K less than her new lower mortgage amount. I could see lots of people in a scenario like this just simply throwing in the towel because of the amount of time it would take to bring the mortgage amount back down to near the home’s market value.

3

One potential obstacle to your plan is that the banks that originated the loan don’t hold the note. Credit unions and some savings banks may still lend their own money and hold the paper. Everyone else has sold their loan with the bulk of them going to Fannie and Freddie. Fannie and Freddie then securitized the loans and sold the new paper to wall street, insurance companies, pension funds, and even foreign governments.

When you make your monthly payment, the bank does not get it, it goes to the investor or entity that actually holds the paper.

Can you make your plan work in this environment?

4

Thanks both for your feedback…It’s good to consider these points.

Of course these sample numbers can go any direction. I didn’t go further with the second example for Ms. Jones but she’d have the option to pay 75% of her monthly payment after the loan was reworked for 2 years before an interest increase. Though her loan is still $120,000.00 more than the home value, her payment has gone from $2,500 to potentially about $1,500.00. No matter what, Ms. Jones needs to live somewhere and this way she has a better chance of keeping her home while the economy improves.

It really bothers me when I hear “tax relief”. I don’t know about you guys but that’s maybe $100 or month back in our pockets. Redirected mortgage payments would put $1,100.00 in our family’s pocket each month.

Now Dave T. you bring up the complexity of this problem. The way I see this, it starts with the person who can or cannot pay the mortgage. The paper trail can be followed from there. Now, the investors may see some loss for 3 years but there is a much better chance of seeing that mortgage perform after this period. Right now the holders of that paper face far more uncertainty.