One of the stories lost during the media frenzy concerning Michael Jackson's death concerns a new idea for homeowners. It's called "vesting forgiveness of debt". This new idea from Washington might allow homeowners to refinance their existing underwater mortgages with new loans from the government. Why is this important?
Currently many Americans are walking away from their homes, not because they can't continue to make their payments, but because of negative equity. Based on a recent survey, approximately 26% of all foreclosures are strategic, meaning that homeowners feel that they would be better off walking away and trying to buy later, as they feel that housing prices are going to slide further down.
Vesting forgiveness of debt might encourage those homeowners to stay. Here is how the plan would work:
Let's suppose that Mark Jones owns a home that is worth $300,000 in today's market. Unfortunately Mr. Jones owes $400,000 against it. In this case, the government would refinance Mark's property by making two new loans against it. Fannie Mae would create a new first loan for $300,000 and the US Treasury would issue a second loan for $100,000.
The new Treasury loan would be an interest only loan. Unlike a traditional loan, however, for each year that Mr. Jones stays current on both loans, one fifth of the Treasury loan would be forgiven. In five years, Mr. Jones would completely pay off his second loan!
The idea is to give an incentive to homeowners like Jones to stay current on their mortgages as well as return to a "positive net equity" position before they retire. The cost to the government is estimated to be around 75 to 100 billion dollars, and the government assumes that it would save approximately 1.5 million homes from foreclosure or complete abandonment.
So far the Obama administration has not embraced this new idea or any kind of vesting debt reduction, but hasn't rejected the idea either, preferring for the present time to continue to restructure and modify more than one million mortgages via the Making Homes Affordable program.
Good idea or bad? What do you think?
Bob Boog is the author of Selling Homes 1-2-3. His latest work is called Mortgage Modifications Made Easy and can be found at www.free-loan-mod-info.com
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