Warning: Bit of a rant.
It’s hard to pick up a news paper, surf the Internet or turn on the TV without seeing something about how bad the economy is and the chances are good the story will at least mention “problems” in the housing market.
I have a lot of thoughts and could write for a long time on whose fault it is and why the bubble and crash happened but that’s not what I wanted to write about. I wanted to write about how I think the problem can be fixed.
The repercussion is prices have declined quickly from all time highs. Over the long term home prices will move back up but not as fast as they came down. Because most people bought homes with a low down payment or exotic mortgage terms they owe more then the house is worth or are “upside down” on the mortgage which makes it almost impossible to sell the home or adjust the terms because they can’t come up with the money and banks don’t want to sell at a loss. This leads to foreclosures and then damaged homes and mostly bad things.
I agree with most of the talking heads on TV and government people that stopping foreclosures is important to stopping the trouble in the housing market. But I differ because I am strongly opposed to loan modifications and debt forgiveness ideas that have been floated about.
With that said here is my 7 point plan for recovery that is fair to everyone:
1. If you are in a home and on time with your payments and have the means to continue making your mortgage payments no help for you. Ride it out for a few years and things will be fine.
2. Short sales: The government will provide the seller a loan for the amount owed at closing provided the sale is within 5% of comparable sales prices in the last 3 months (prevents the bottom from falling out to quickly). This loan will be repayable over 30 years at a 1.5% interest rate. Bank approval is not required if the loan program is used and Banks must account for 50% of the loss. Homeowners can still try the traditional short sale route but to encourage use of this program credit scores will not be impacted if the program is used.
3. Foreclosures: Anyone that foreclosures on their home will have the option to remain in the home and pay rent until the home is resold. Rent will not be “market” value but instead based on a 30% total debt to income ratio with a set minimum. Provisions will be put in place for legal action if home damaged during tenants occupation. Renters will be given 1 months notice of pending sale of the home.
4. Every prospective home-buyer most attend a home buying seminar and successfully complete an exam to demonstrate understanding of the process.
5. All mortgages will include a 1 page summary document highlighting key facts (amount, interest rate, type, total monthly payment)
6. 5% down payment is required
7. A reminder that it is not a god given right that you will own a home
I think this plan would work because it lets the market take care of prices and do it with limited intervention. By providing government loans to short sales it gets people out of bad situations but with manageable consequences, and averts foreclosures. Banks will be removed from the majority of short sales so the process will be quicker and banks will still have to write off losses for making bad loans. The government wins because the money they lend out is being repaid and with interest. Fixing the short sales is the main idea, the foreclosure idea helps the properties stay in good shape and allows people somewhere to stay while they get things sorted out.
The last four points hope to educate home-buyers and eliminate deceptive lending practices. By having a minimum down payment requirement this helps to limit the amount of people that get upside down in their home.
Bam done problem fixed. It’s a bit of a rant so hopefully it makes sense, what do you think?