Foreclosure Crisis Solution: 1 Trillion In Federal Aide & Convert Homeowners Into Temporary Tenants

[Better Believe It]

-I really like the suggestion in the last paragraph on how homeowners who still can't make their payments after loan modification could be helped and still remain in their home. What do other DU'ers think about that proposal?-

Nouriel Roubini's Global EconoMonitor
RGE Monitor - 2009 U.S. Economic Outlook
RGE Lead Analysts
January 13, 2009

Taming the Foreclosure Problem

To make government intervention more effective, several proposals have been made recently. These include: Congressional intervention to allow bankruptcy judges to change mortgage terms and reduce the mortgage principal. The government should refinance the mortgage into a longer term mortgage at a low and fixed interest rate. The reduction of the mortgage principal can be based on the extent of decline in home prices in a given region. The new interest rate can be based on the 1.6% spread between the 30-year fixed rate mortgage and the 10-year Treasury bonds. Monthly payments can be “interest-only” payments for the first few years. This would help establish positive equity for the homeowner and fix the problem of insolvency thereby making the monthly payments more affordable and reducing the risk of default on refinanced mortgage.

To increase participation, the program would be mandatory for lenders. Government can also condition capital injection into banks and purchase MBSs on banks’ willingness to modify mortgages. Also to attract lenders, the government should share the cost of modifying the loan with the lender by matching the cut in principal or interest rate by a proportionate or less than proportionate amount. As an incentive, the lender will be entitled to a share in profit from home appreciation if the homeowner sells the house in the future. The refinanced mortgages will be a ‘full-recourse’ loan. Or the government can share any losses due to default by homeowners on the modified mortgage.

Estimates suggest that a program to help those with negative home equity currently will cost over $600 bn. However, as prices overcorrect, more homes fall into negative equity and defaults on the refinanced mortgages continue, the cost would exceed a trillion. But in order to reduce the fiscal costs, the government should be the senior debt holder of the modified mortgage. With an equity position, it can benefit from the future home appreciation.

The eligibility criteria to qualify for the government program will be stringent: The homeowner should have a high debt/income ratio, the current mortgage should have a high interest rate or a high outstanding principal relative to the current home value; or the homeowner should be facing legal action for mortgage default or foreclosure. The program should target first-time homeowners in regions/states that are witnessing the largest home price correction and foreclosure rate. Those unable to meet monthly payments due to interest rate re-sets or facing higher monthly payments due to the recession (credit constraint, unemployment, falling wage and asset incomes) can also be targeted.

However, homeowners who won’t be capable of servicing the monthly payments even after modifying the loans can be converted into tenants for the same house for a given period of time under an agreement with the lender. The lender would release the homeowner from the mortgage obligations and will require the homeowner to just pay the rent during the given time period. At the end of the period as the homeowner’s income position and financing options improve, he will have the option to re-acquire the house from the lender at the then market value of the house, or even take a new mortgage to finance the house based his ability to pay. Hence, rather than forcing foreclosure on homeowners who fail to qualify for the government program, this alternative will prevent further foreclosures and excess home supply in the market. Moreover, it offers at least some cash flow for the lenders and avoids any fiscal risk for the government.

Please read the entire document at:

http://www.rgemonitor.com/roubini-monitor/255009/rge_monitor_-_2009_us_economic_outlook

[benld74]

1. BUT if the butt heads on wall street don't want it it will not get done