Real Hope for America in a Real Solution Here we are, near the end of the first quarter of 2009, and we seem to be no closer to solving the economic duress that started many quarters ago. The first warning shots were fired over the bow when the two, now defunct, Bear Stearns funds imploded. I sit here on a daily basis, watching as all the key government officials offer up useless programs that do absolutely nothing to stem the tide and tackle the root problem where it lies, the consumer. They want to spend money on pet projects, using the situation as leverage, assuring us that all these programs will work. Meanwhile, the layoffs and foreclosures continue, in a spiraling negative feedback loop with no end in sight. The Fed has taken the stance of propping up financial institutions, sending check after check to companies that are reeling from the leverage applied to packaged mortgages. Why are these structures underwater in the first place? The first answer is leverage, but the key to this all is the consumers ability to pay back these loans, which leads to the point of how to stop this fiasco from going any further. So far the Fed has failed to apply water to the fire, they are attempting to keep the building down the block from catching on fire and even that is not working. If they are not careful, they will run out of water and the city will burn to the ground. Instead of pumping money into banks at near nil interest rates, taking these hemorrhaging assets as collateral, why not offer anyone with a current mortgage a 1%, 30 year fixed rate mortgage? Is it not the same thing? The obvious difference is it helps the root problem at the consumer level. Giving money to banks is not working; people are still having a hard time with their current terms. Allowing a consumer to refinance, immediately provides relief and shores up housing as foreclosures will largely cease. In this plan, the government will assume the note, which recapitalizes the lending institutions the proper way. The government still has the right to foreclose on non-performing loans, but how many people will walk on a one-time rate of 1%? For the people that are considering walking on notes because their houses are worth less than they owe, this is a game changer. You may ask how will the government afford to lend all this at 1%? Will they make any money at all? I would ask the question how much will the government lose to all the banks by taking on these failing assets as collateral if this program isnât made available? These assets will continue to erode until the consumer is given this type of relief. Everybody wins with this program. Without it, the tax base will continue to contract as we head further into a depression. This plan actually puts real money in American households pockets, money to pay off debts, money to save and invest and money to spend in the economy. For example, a $180,000 house that currently has a 30 year 6.5% rate, has a monthly note of $1,137.72. If that borrower opted in to this offer, that same note would be $578.95. That is a savings of $558.77 each and every month for that household, or $6,705.24 a year. That is real stimulus. This program does not give away free money, it still requires financial payment and responsibility, and will ultimately not cost the taxpayer a dime. It recapitalizes the banks by paying off the current notes as the government assumes the mortgage thus ceasing the destruction from leveraged losses. This in turn will free up available credit from lending institutions so people can once again borrow to start new businesses, grow existing businesses, make payrolls, and replace old vehicles. It is all as simple as an interest rate change to the consumer. This program stops the destruction of wealth, stops foreclosures and falling housing values and ultimately stops job losses as consumers are recapitalized; the consumers that represent 70% of GDP. But most importantly, this program offers real hope. Is Washington listening?
I'm not trying to take credit or anything, but that is my idea as well. I have even said if they would just go to 2-3%, it would be a huge help. Here are some other thoughts on what I think they should do as part of it however: 1. It would not just apply to first homes, but second, third, etc. as well, regardless of if they are used for rentals or vacation/second homes. Don't punish people just because they wanted to be investors. 2. To do it best, it would be done automatically for the homeowner. ie. if you currently have say a 150K loan at 6.5% and pay $1200 a month, you would just get a new payment statement with the new amount, which would probably be something like $800 range then. This would help homeowners of course, but it would also help renters, as rents could go down, and they could look for homes knowing they can pay once in a lifetime low interest rates. If the govt. would simply have the sense to do this, alot of these problems would be over much quicker then otherwise. JJacksET4
Great logic there. You know I wanted to be a professional baseball player when I was a kid should the Yankees give me a contract even though I clearly don't have the skills?
huh? lol I am not talking about investors who screwed up or something if that's what you are implying - I am saying if I bought a house as an investment and say my rate is 6% and I'm paying full on it each month, if the govt. punishes me by not lowering my rates, guess what - that money just gets pushed onto the renters in the long run. Sorry if that's not what you meant, but I didn't understand it clearly then. There seems to be alot of vilification of people who just want to make money honestly these days. JJackET4
So your idea of making money honestly is having the government lower your mortgage to an arbitrarily low rate so you (and I don't mean you specifically, as I have no idea of your personal situation, but people in general) can keep an investment you never should have made? That's an honest living? Renters will also be served well by having housing prices continue to go lower as landlords will then charge less rent, and this can be achieved by letting savvy investors buy the property at a discount from those who miscalculated and paid too much. I know it is a radical notion these days, but maybe the government shouldn't be in the housing business or any other business picking winners and losers.
No, again, I am talking about an investment that I am perfectly happy having made. As the OP pointed out, I would simply have more money in my pocket then. For example, right now, assume I pay $800/month (including ins. and property tax) on a house and I rent it out for $750/month. I am perfectly happy with that, as I gain $50 a month, plus a tax break and small equity each month. (on the other hand, remember that I had to put some money down, plus I take some risks each month, etc.) That being said, if my rate were lowered to 2%, maybe my payment would go down to $650-700 range. Now, if the current renters move out, I could reduce the rent to $750 or maybe $700 if need be. Again, I'm not asking for anything for myself or for anyone who tried to "flip" houses or anything - just saying that if I got an extra $100/month in savings for example, I could split that - $50 cheaper rent, and I'd invest or spend the other $50. Either way, I am going to "keep" my investment - the question is where is it doing the economy any good that the extra $100 per month is going to the bank? JJacksET4
I think we are just going to have to agree to disagree. While I certainly agree that the money going to you versus the bank would be better for the economy overall I see a proposal like this putting an artificial floor in housing prices. Isn't this across the board low rate going to be priced into housing prices rather quickly, keep prices higher than they should be and keep rents higher? While you could lower rents, why would you if the market stabilized and landlords were given essentially a gift of instant appreciation all at the same time? From my point of view as a renter, home prices falling are the solution, not the problem.
I agree. Sometimes it's just hard to agree, but I think we both want the best for the country, etc. anyways. Of course, people in different situations see things different sometimes. I would point out 2 things here: 1. Where I have been buying and renting out (its a midwest city), prices might have dropped somewhat, but not much, but rents have actually gone up somewhat at least in the best school districts - where I have my properties. If a house falls 5-10%, that's not going to drop rents - if houses aren't selling to investors (i.e. changing from owners who want to live there to owners who want to rent), that can cause rents to go up. 2. There are owners I'm sure who would love to sell their house right now for around their ask price, and quite honestly, I would consider buying another property if I could get 1% or something, but with 401Ks, markets, jobs, etc. being what they are, I am holding off. So, it just hurts the market (and doesn't open up that house as a potential rental property). In theory, I would love for the market to always work correctly, but sometimes it doesn't. JJacksET4