Hot Docs: Fannie Mae, Freddie Mac, and the Financial Crisis, Adults Playing Video Games

A solution to the home mortgage problem

1. The government should purchase only a predetermined portion of any toxic or nonperforming mortgage package offered. This would save a part of the federal funds, give the existing lender an incentive to help solve the problem, would be easily implemented, and possibly save the government from actually managing vacant houses. For example, purchase 60% of any existing packaged portfolio of troubled properties valued at the face amount of the mortgages or the outstanding remaining equity balance, whichever is less. Any income would go first to pay the operating expense, secondly to repay some small interest to the government for participation, and thirdly to retire the entire portfolio in proportion to the percentage owned. When implemented with step two below, the government investment in each package is easily determined with no reverse auctions or appraisals necessary, does not completely bail out speculators or high risk lenders, removes a large, readily determined percentage of liabilities from lenders portfolios, and may leave in place some servicers and managers of the mortgages and properties. I doubt the government is really set up to manage vacant houses across the nation.

2. Reset the interest on all primary personal residential home loans made by commercial banks or conventional mortgage lenders who tender packages of mortgages (performing or non performing) to a fixed rate of 4% amortized over 30 years. This would adjust nearly all payments to a lower amount and would still give mortgage investors a return far above treasury rates. If they choose, homeowners could still make larger payments with the excess balance going toward reducing the loan amount. This would not require appraisals, renegotiations of loans, loan fees, credit reports, etc., or months of paper work: just a reamortization of the payments. It would be done across the board to every loan in any package offered. In reverse, lenders with performing books of loans could sell 40% to the government and retain 60% giving them additional money to loan as well as a majority position is performing assets.

3. Allow anyone with an existing mortgage and good credit to refinance at 4.5% amortized over thirty years if the current lender does not offer to join the program or reset the rate. Refinancing would only be for the outstanding balance of the current loan and would not require appraisals, only a credit report and title insurance. The program should run for a minimum of three years.

Example: A mortgage loan of $300,000 at 6.5% interest amortized over 30 years requires a principal and interest payment of $1896.50 per month. At 4%, the payment is $1432.25 a savings to the homeowner of approximately $400 per month continuously with no reverse auctions, appraisals, radon checks, or excessive loan processing fees. A far better stimulus than a $600 one-time tax rebate.