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What Do You Think of This Woman’s Mortgage Proposal?
By JLP | February 2, 2009
One of my friends posted this on her facebook page and I thought I would share it with you:
It’s an interesting idea. But, I have some questions:
1. How could something of this magnitude be carried out? This would be huge! I don’t think it would be as easy as this lady makes it out to be.
2. Would it really help those who are on the verge of foreclosure? I seriously doubt it. Many of these people couldn’t afford paying just the principal on their mortgage.
3. What about the impact on the banks? That’s a lot of lost revenues.
4. Who decides when things are “back to normal” and mortgage rates can be set by the market?
I did some simple math and based on my numbers, my wife and I would save about $175 per month if our mortgage interest rate was reduced to 4.5%. Granted, my wife and I have a rather small mortgage. A family with a larger mortgage would most likely see substantial savings.
So, what are your thoughts? Is this idea feasible?
Topics: Housing Market, Mortgages | 19 Comments »
February 2nd, 2009 at 6:54 pm
It would probably be realy easy to implement, just legislate it as long as it’s possible under the constitution. Just like a sales tax change or a personal income tax change.
Maybe there is a really sweet spot where if the interest rate is set then some really high percentage of foreclosures are prevented. I guess she’s just throwing out 4.5% as an example.
As well, isn’t 4.5% lower than the current mortgage rates?
She seems to be trying to get the payments affordable so why not suggest that. Perhaps a max payment of 50% of take home pay for example. The principal would still be owed and the interest could accrue at a standard rate like prime + 1 or something.
The problem just seems so intractible.
February 2nd, 2009 at 7:31 pm
I don’t think that implementing the program would be quite as big of a deal as you make think it would be; after all, most is computerized and could (theoretically) be as simple as a one-number change. Theoretically. I think #3 and 4 are the most problematic. Overall, it’s something that should be considered. It would certainly do more good than this “stimulus” bill that is being bandied about.
February 2nd, 2009 at 8:17 pm
Here is my plan to prevent mortgage foreclosures-
MAKE YOUR FREAKING PAYMENTS!
That’s what I’m doing.
February 2nd, 2009 at 8:37 pm
She mentioned readjusting mortgage loans. That might imply not just lowering the interest rates. If it also readjusted the term of the mortgage to a longer term, you’d make smaller payments over a longer time, and this would compensate a bit for #3. And even if it wouldn’t lengthen the term, what about people who are currently underwater with their mortgages? The banks foreclose, and sell the property for less than what you still owed? Unless what they sell it for plus what you already paid amounts to the original principal of the mortgage, that’s a loss. They’ll get more revenue if people can actually pay off their mortgages completely, or at the very least they’d break even. Breaking even is better than a loss.
February 2nd, 2009 at 8:58 pm
I’m with Mike on this one.
February 2nd, 2009 at 9:48 pm
The republicans are trying something similar, a 30-year fixed mortgage at 4% in the new stimulus plan. Or is that different?
February 2nd, 2009 at 10:04 pm
@Goal Hunter
I don’t believe this can be legislated under the constitution: it’ll be like re-writing legal contracts and stealing money from banks. The government may be able to request concessions from banks that request bailout money, but it can’t tell other banks how to do their business. And if the bank participates in TARP and the government buys mortgage-backed securities, than government can probably do whatever it wants with mortgages represented by these securities. So the legality of doing it for all mortgages is problematic.
Additionally, if we assume that this is done, it’s unclear if it’ll do anything for the economy. Even with all the foreclosures the vast majority of mortgages are still fine. Not everyone is under water – in many areas people who bought in the 90s and early 2000s still have nice equity.
Also, we don’t know the effect this will have on the value of mortgage-backed securities. It is the continuing losses in value of these securities and resulting write-downs which is the main problem. Would this program stabilize their value or decrease it further? I’d suspect it may stabilize the value of MBS representing the worst mortgages – these are already selling for as low as 20 cents on a dollar as if most mortgages fail and there is no recovery. But some of these mortgages will fail anyway.
It all depends on 3. – lost revenues for banks. Currently under 10% of mortgages default (maybe even 5%, I don’t remember the exact number). The majority of mortgages are OK and bringing income. So if these mortgages were rewritten, the banks will lose money on their best performing mortgages (and result in considerable losses in better CDOs. This loss may be partially offset by reducing the number of foreclosures, but as JLP correctly said – in many of these cases the buyers couldn’t even afford homes at 0%. So I think it is likely to result in net loss.
It seems to me that this would especially hurt healthier banks – those with good balance sheet, little exposure to derivatives and best performing loans.
How would hurting a few banks that are still solvent help the economy?
I find it amazing how she thinks banks are all guilty and buyers are all innocent victims. Certainly many of bank executives and Wall Street speculators are to blame, maybe more so than many buyers. But people who took mortgages they cannot afford are responsible too.
February 2nd, 2009 at 10:58 pm
I’m paying just fine. I’ve been paying just fine. I plan on continuing to pay. But I’m all over this. The economy sucks butt. Prices are all over the place in nearly every market (including various food prices) because people who were irresponsible screwed up pretty hard (yes, banks and people).
That said, I’m all over it because I’m tired of getting the short end of the stick. Get me in on any bailout and it is ok in my book. Would I RATHER have $30,000 instead of everything else? Yes. Would I RATHER the system not be screwed? Yes. But I’ve given up the fight, as letter after letter to legislator comes back with a “I understand the concerns of my constituents but I had to vote for N-bailout because…” blah blah blah.
So bring it on – and while you’re at it – make it 3% for the folks who are on time.
On a technical level, I’m very much against a web site to “Type in your mortgage information”. Talk about a phishers wet dream.
February 2nd, 2009 at 11:26 pm
Hehe, all those people were investment geniuses just two, three years ago.
February 2nd, 2009 at 11:45 pm
I agree with Mike.
February 3rd, 2009 at 4:06 am
I see videos like this and I wonder why these people want to lock my generation out of home ownership forever, because that is the long term effect. Prices are too high; prices will come down. The pre-existing and still wholly functioning legal mechanisms to facilitate the process are foreclosure and bankruptcy.
If we were seeing a huge post-foreclosure refugee population freezing to death in gutters I can imagine supporting a broad intervention. But we aren’t, that’s not what happens.
February 3rd, 2009 at 7:52 am
It may be in the bank’s best interest to selectively work with some mortgage holders on a new rate or new terms, but the government should not get involved.
February 3rd, 2009 at 8:03 am
@AJ: The GOP Senators are proposing the 4% rate for homebuyers or refinancing. It’s a little different, since this lady is suggesting everyone automatically get the lower rate. With the GOP plan, you have to be “creditworthy” and apply for the mortgage. Which, really, I like (and there’s not much that the GOP suggests that I like), since it rewards those of us who are being responsible with our finances.
February 3rd, 2009 at 9:24 am
Making house payments affordable would definitely improve the value of those “toxic debt” packages. And if part of this refinancing included changing the term of the mortgage to a longer term to compensate for the lower interest rate, the banks would still make money. Just not as quickly. This would allow more people in danger of foreclosure to keep their homes. It would give the more responsible people who budget their expenses and save and make their payments on time more disposable income, which they could either use to pay down the principle, or else save it, invest it or spend it. It makes more sense if this plan adjusts the term as well as the interest rate.
February 3rd, 2009 at 10:55 am
It seems as if mortgage balance relative to current value is a driving force in default and foreclosure. I’ve heard that almost 60% of modified loans, those that have had the rate or terms adjusted to a more affordable level, re default within 6 months. It would seem as if people don’t want the price tag associated with an upside down, depreciating asset when they can rent the same house down the street for 50% of their mortgage payment. While the presenters idea of a nice low interest rate for all makes for good dicussion, I don’t think it would do much to solve the housing issues of today.
February 3rd, 2009 at 3:17 pm
Mike took the words right out of my mouth.
Here’s what I don’t understand … when each one of us signed on the dotted lines, there was no fine print that stated, “You pay this monthly amount only if all your other needs and wants are met …” YOU PAY YOUR MORTGAGE AND ALL YOUR DEBTS — PERIOD! It seems everyone wants a free pass these days. Each and every one of us is accountable for ourselves, no matter what the other guy is doing.
February 3rd, 2009 at 5:42 pm
The only way this could work is if the government buys up all existing mortgages. Doing this would obviously cost trillions. Even finding out who owns these mortgages could take months and cost billions.
Trying to rewrite tens of millions of contracts “by command” – which is what it sounds like she wants – would be impossible as it would be an unconstitutional “taking”, as Kitty said.
February 5th, 2009 at 12:18 am
Obama has been president for almost a month – how come I am still paying my mortgage? I’m just not seeing the change yet!
I got an idea, how about the government just come out and OWN all the houses. Then they can tell you what you can and can’t build, what you can and can’t do behind closed doors, and even add limits to your pay – after all you won’t have a mortgage. That will solve everyone’s problem!
Yes, I’m being sarcastic. You sign the paper, you pay the debt. I’m getting DISGUSTED by doing the right thing while others are being forgiven for their outright greed and ignorance.
I work damn hard to make my mortgage payments and have a comfortable life and it drives me crazy when I look at how much money I end up giving this government so Mr & Mrs Irresponsible can continue to F up their lives. I want my LIBERTY back!
February 28th, 2009 at 10:07 pm
She lost me at the part about “government immediately mandating that all mortgages be dropped to a rate of four percent” or whatever.
Can’t be done. Little details like contract law, securitization, default swaps based on “credit events” (which this would likely constitute) and OH YEAH the need to correctly price RISK make this a non-starter.
But thanks for playing.
Kids, there is no going back.
Someone (looking more and more like the taxpayer, sadly) Must. Take. The. Losses.