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:
- 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.
- 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:
- Savings plan transfers 25% of ALL non-commercial mortgages. Includes primary, secondary and investment properties currently in existence and acquired through December 2010.
- Savings plan extends to any conventional mortgage created through 2010 to promote new home purchases and free up bank inventory.
- Banks are required to follow strict lending guidelines for its borrowers (reinstate the old, effective guidelines).
- Bank guidelines would allow for 10% down to keep home values from falling further
OTHER CONSIDERATIONS:
- This plan is very basic and needs to allow for other variables since this is a very complex issue
- A knowledgeable accounting professional needs to consider the balance sheet adjustments
- Requires new GAAP rules
THE MORTGAGE PAYMENT SAVINGS ACCOUNT PLAN BENEFITS:
- Limits government involvement
- Allows the free-market to ultimately solve the problem with the banks bearing some of the burden
- Forces Americans to save money
- Allows Americans to feel comfortable spending the extra money they may bring in
- Gives Americans incentives to purchase homes
- Allows banks to issue more loans
- Restores main-street and investor confidence in our economic system
- Allows owners of investment properties to decrease rents during this difficult economic period
- Avoids unnecessary and costly appraisals
- Promotes job creation within the banking and real estate sectors
- Creates a built-in system of incentives, over-sight, cross-checking and accountability
- 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!!!