The 4.0% Solution to The Housing Crisis…”Gravy Train or Free Market”?
As the government postures and the markets react there has been some constructive discussions from influential parties toward a solution. The primary goal is to keep as many people in their homes with an affordable solution as possible regardless of whether they have equity in the home. This will slow down the default rate and the foreclosure machine. How are we going to get there? The standard Loan Modification does not appear to work.
The 4.0% solution will provide 30 year fixed rate loans to people that are determined to be eligible to keep them in their homes. The rational for this move is that the US Government is already guaranteeing the 5.2 trillion in debt for Fannie and Freddie with our government paper. The long term government paper is yielding less than 4.0% so this does not appear to be a bad idea. The key is to find an affordable solution for people to stay in their homes and also create an incentive for them to stay as well.
Most people are creatures of habit and would like to stay in their homes. However, when you are facing $200,000 in mortgage debt over what the home can be sold for, and also and impending 40-50% payment adjustment, it is very difficult to create an affordable solution and an incentive for the homeowner to stay in the home with the current lender.
The 4.0% solution is much like our Hybrid Refinance except obviously a 30 year fixed rate would be government subsidized and it would completely take the existing lender out of the equation.
I think this is a great idea where loss sharing could be established between the government entity and the existing lender. The government does not have to force the hand of the lender upfront to write down the principle. The subsidy portion of the solution could also be laddered across the general population of eligible distressed homeowners. Not everyone will need a 4.0% subsidized loan for 30 years. Ladder the terms much like a bond ladder. Some homeowners would receive a 4.0% for 3 years, or 5 or even 7 years before a maximum of 1.0% annual adjustments to the market rate at origination of the loan has been met. Correlate the subsidy to the needs of the homeowners. Some homeowners will not be eligible. The adjustments would eventually eliminate the government subsidy. Some of the debt may have to linger with no payments if the homeowner cannot afford it even at the 4.0%. Regardless, it’s a good deal for the homeowner and the lender.
This program would make it affordable for many distressed homeowners but certainly not all of those affected. The government’s loss participation with the existing lender would minimize the public perception that it is a bailout. This also has a free market friendly appearance. And lastly and of equal importance, the homeowner has the incentive to stay in the home because over time they will only adjust up to a 30 year fixed rate of approximately 6-6.5%. Sounds like a long term solution to me. Who is going to make the call to Uncle Sam?
Any attempts to persuade lenders to forgive existing debt while allowing the homeowners to stay in the home have not worked. This is a fact on a macro level that was validated by Shiela Blair of the FDIC recently on CNBC. The less upheaval to the distressed homeowner will in most cases equate to a lower the loss ratio to all parties.
We don’t have to jump to debt forgiveness. That would be a handout and the markets don’t like handouts. The 4.0% Solution is only an idea for those that would like to stay in their homes. If you are flexible to leave your home, and would like to learn about the “Mac Daddy” of all free market solutions, then you must educate yourself with the Short Sale Solution. Rid yourself of affordability issues and avoid foreclosure with the Real Estate Short Sale.
The Real Estate Short Sale is the only free market solution that levels the playing field and provides you relief with the opportunity to get, the majority and in many cases, all of the residual mortgage debt forgiven. If you need to delay or stop foreclosure, the Short Sale, can not be beat on merit. However, please don’t take my word for it without research.
Our best clients for Real Estate Short Sales are the ones that have been beaten by their lenders with false hopes of extravagant Loan Modifications only to find out that the lender is an ambivalent dictator. The homeowner becomes indifferent and then this merely becomes a business transaction. That is exactly where our course “The Negotiated Solution” will take you without the need to get the 60-120 day beat down from your lender. Check it out. It comes with a money back guarantee.
There are many ideas to stabilize the housing crisis. I say we use them all selectively as we fit them to the needs of the distressed homeowners. Let’s draw out the time frame of the problem so the economy and the real estate market are not overwhelmed by it. In the end, when signs of fundamental stability return to the housing market, you will see all of our other problems and fears in the financial markets quickly dissipate. Housing is the key and we are over thinking it and allowing it to consume us. Blogging from the front line of the housing mess.
GHunter
