While I am pleased to see the Fed is finally focused on the foreclosure crisis, however we can no longer hope to successfully address the problem without simultaneously, stimulating existing home sales. Without absorbing the excess inventory the crisis will slow but continue to deepen.
Clearly the $7500 Tax Credit (technically, an interest free loan) enacted by Congress earlier this year, was all but ignored and with good reason. Sidelined borrowers have been waiting for housing values to drop further, and so far they have been right. If we want to stabilize plummeting housing prices the best way to do so is to workout as many foreclosures as possible while enticing demand off the sidelines. How do we do that? Here's an idea:
From it's inception until the 1980's HUD regulated FHA loan rates. Since the FED is currently the de-facto mortgage lender for all borrowers with less than 20% to put down, why not reinstate HUD's authority to regulate the FHA loan rates for a short term stimulus period (Say 6-12 months). HUD would then declare a "Mortgage Sale" " Hurry While Supplies Last: All LOANS 4.5%. The sale would be good only for 6 months with an option, on a quarterly basis thereafter to: extend; increase the rate; change the terms or terminate as needed. Participating lenders would be allowed to charge no more than a 1-1.5% loan origination fee. The lenders could use the program to get at-risk loans off their books while at the same time earning modest origination fees and developing relationships with new customers. The "Sale" rate should be applicable to the following borrowers:
1. Borrowers in foreclosure. Advantage: At lower rates lenders could reduce their write-downs when renegotiating their loans thereby retaining more cash from the pay-off which could be available to make other investments.
2. Underwater borrowers (those whose home values have dipped more than 15%). These borrowers would be allowed to refinance their existing loans at their existing level (no discounts). Advantage: Borrowers would have some breathing room while still taking responsibility for their loans AND would be far less likely to walk away from their properties adding to the existing foreclosure debacle.
3. First time buyers and repeat buyers (move-up buyers who have sold their home) with no existing mortgages. Limiting it to people with no existing loans would preclude people with the financial wherewithal from gaming the system by buying a similar property for less and then abandoning their original property to foreclosure. Advantage: At 4.5% a buyer who, at today's rate of 5.875% (Chase Home Finance) could afford a $200,000 property, would be able to afford a $233,500 property maintaining the same payment. Most Buyers have a heard-mentality, once their friends begin to buy, they will too. Further, they will almost always buy up to a higher price when they can afford to. If enough borrowers take advantage of a "Mortgage Rate Sale" housing prices could stabilize quickly.
As a further stimulus we should extend the $7500 tax credit (loan) to run simultaneously.
Today's 30 year Treasury yield curve was 3.63%. If we are borrowing at 3.63% and lending at 4.5% we are looking at a 19% return on the tax payer's money assuming the borrowers stay in their homes the full 30 years. A 19% return isn't bad when you can use it to stabilize the economy. It's a better return than we can hope to get from the Citi Bank bailout. Housing lead us into the decline, here is a stimulus idea to lead us out.
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