To answer President-elect Obama’s call for ideas to help resolve the economic crisis, I thought I would offer an alternative approach to addressing the housing mortgage “crisis”. The approach presently under consideration proposes to provide additional funds to lending institutions by purchasing non-performing assets or toxic assets, in order for banks to lend and drive the recovery. So far the bailout money given to banks has gone to bolstering the banks balance sheets and executive bonuses and not to extending credit. To further exacerbate the credit crisis, banks are tightening credit standards, refusing to extend credit and are reducing credit lines.
The “bailout” includes a provision for government agencies to buy mortgages that are in default or renegotiate the terms of defaulting mortgages, in an attempt to lessen the number of foreclosures and distressed homes on the market. The plan was to stop foreclosures and stop the downward slide of home prices. Clearly the plan has not worked and has led some people to purposely default on their mortgage payments, thus gaming the system to lower their monthly payments and loan obligations.
The rescue program rewards poor money management and investment speculation by mitigating foreclosures of people who took on mortgages for home purchases that was beyond their means to pay. Foreclosure mitigation should only be for people who have lost a job or experienced health issues that caused economic stress. Foreclosure mitigation should be used to help the people who made reasonable home purchases but have suffered job loss or have medical bills beyond their ability to pay, by adjusting mortgage terms to help them stay in their homes. On the other hand, people who have speculated on homes, borrowed beyond their means or rolled the dice for future appreciation have made poor business decisions and should not be “bailed out” by taxpayers.
As well, bank’s seemed to have acted purely for profit by processing loans that would not stay on their books in an effort to generate enormous fees. In some cases, banks acted very aggressively to make the predatory loans to unqualified borrowers. Predatory lenders need to be prosecuted, fined and pay retribution to their victims. The victims of predatory lending should have the loan costs returned them along with a new 30-year fixed mortgage at the prevailing rate.
For any rescue plan to work, it must reward the people who act responsibly, make sound financial decisions when buying a home and are current with their mortgage payments. In essence, the plan must reward good business practices and not poor ones.
I suggest a plan that provides an immediate reduction in 1st mortgage principle of 10% of the homes purchase price for people who have purchased homes from mid 2006 to mid 2008 and who are CURRENT on their payments. The program could have a maximum principle reduction of $25,000 and limit the original purchase price to $417,000. A principle reduction of $25,000 from a mortgage of $200,000 would provide a monthly savings of $156.
In addition to a principle reduction, the interest charged on these existing home loans could be reduced to 4.5%. For the same $200,000, 30-year fixed mortgage, an interest rate reduction from 6.4% to 4.5% would lower the monthly mortgage payment by $238.
The combined program, reduced principle and interest, would give the borrower a monthly savings of $394, an additional $4,752 annually. This immediate savings on monthly expenses would put additional cash in the pocket of the consumer for savings and spending. The lower principle of the 1st mortgage would improve 2nd mortgage holder’s position and raise the likelihood that the home owner will continue to pay on both loans.
Government could use the money from the TARP or some other vehicle to implement these programs without much time or paper work. In all, the lender (bank) and borrower would sign a mortgage modification that states the new terms without the need for a new closing or reapplication. Since all of the new mortgages are electronically filed and can easily be identified, the program’s implementation would be a simple transaction, completely transparent and traceable to limit fraud. The program would further lessen fraud by rewarding the people who are making their mortgage payments and not the ones gaming the system.
To spur home purchases the plan could include a tax credit of 10% of the purchase price up to $25,000 for home priced within the FHA limits of $417,000. Reducing the cost of a home purchase by 10% would be a huge incentive for people to buy homes and would lead to a reduction in the overall housing inventory.
To encourage consumer spending, implement a program that provides a direct reimbursement for energy efficient home improvements. Although there are tax credits already being offered, the uncertain economy limits energy efficient home improvements. Replacing the 30% tax credit with a 50% cash reimbursement for energy efficient home improvements would spur investment into these technologies and help grow jobs. Green, energy efficient technology such as solar, wind, fuel cells, home winterization, geothermal, water recycling and energy efficient appliances should be the focus for this program.
For homeowners, the program could be implemented with an upper limit of $25,000 or 50% of the total cost, which ever is less. For commercial building owners, the program could offer a 30% tax incentive or direct reimbursement up to $100,000 for green improvements. This type of cash reimbursement program would go a long way to getting people to do home improvements, would spur innovation and jump start the general economy. An added bonus of all of these improvements is the amount of money and energy saved and a better environment for all of us to live in.
We must encourage new homes to be smaller and higher in energy efficiency. Less expensive homes and cheaper monthly utility costs would encourage more home buying. Institute incentives and regulations that require all new homes to incorporate energy efficient technology ie: geothermal, solar, super insulated walls, roofs and windows and recycled materials. As well, require all commercial buildings to install energy efficient solar panels, wind turbines where applicable, fuel cell technology, water reclamation, effluent reduction and more efficient heating and cooling.
Buildings that employ fuel cells with self generating hydrogen systems will produce most, if not all, electricity used in the building, can sell excess capacity and produce all the hot water needed, a by product of fuel cell technology. Green technology is good economic policy and will generate cash flow and savings for businesses that employ new efficient production and operating strategies.
It is my firm belief that programs that reward responsible money management and healthy energy efficient buildings will go a long way to improving our economy and environment. The programs discussed here would expand the economy, create jobs and improve our standard of living. In the end, our rescue programs should focus on improving our lives, reward the people who keep their commitments and drive energy efficiency for a better place to live and a more prosperous economy.