It’s hard to oppose the idea of providing easy-to-understand mortgages and credit cards to American consumers. But do we need a new federal agency to do the job?
Consumer advocates say we do, because existing regulators failed to stop the spread of subprime mortgages and other products that were all about generating fees, not meeting consumers’ needs.Read more...
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There was a big misconception that if you give banks billions of dollars, that they'd trickle it down through the economy. Trickle down Economics works in a growing economy but doesn't work in an economy where private industry is sinking. Bailouts should only be offered when we've reached a bottom. Consider the consequences if the government gave money to someone who was living well beyond their means. Need I say more?
Bailouts from the TOP down are not going to work in this spiraling economy. There must be a reward on both ends of the Mortgage industry for a successful turnaround to occur. That is why I'm proposing the following plan.
The first proposal in my plan addresses the borrowers. The government must come up with a plan that is good for borrowers, good for lenders and promotes home ownership even during hard times in which a home is upside down. Recently, borrowers have begun questioning how much good credit is really worth. With home prices in some regions in the United States 40 to 50% below market highs, borrowers are comparing their 700 plus credit score to their $200,000.00 net equity implosion on their home loan. I've spoken to several borrowers who care less about their credit in these conditions.
The second proposal in my plan addresses the economic equity crisis in our banking institutions. More and more banks are nolonger capable of lending money even to good borrowers simply because they don't have money to lend. Most Americans with good credit and good income can attest that they've recently been denied credit by their banks. Often times they are for reasons that are unclear and unexplainable. American Express, Bank of America, CITI Corp, and many other banks are begining to lower credit lines, close lines of credit, and deny applications to credit to both good and bad borrowers.
The answer doesn't lie in providing these banks a blank check. The policies of Corporate America are NOT to give away money in poor economic conditions. Their first objective is to appease investors. It's in their best interest to use the money that is given to them by the Feds to instead buy more banks that have fresh deposits. Rather than become more vulnerable through lending, there objective is to get as much cash in to their balance sheets as possible.
ALL THREE PROPOSALS ARE NECESSARY FOR IT TO WORK:
FIRST PROPOSAL:
Provide an incentive to borrowers to pay their mortgage. Right now, borrowers are being given an incentive to NOT pay their mortgage. This is resulting in bad borrowers walking away from their good credit and homes. Providing incentive is simple. Mortgage companies need to adopt a Principle payment BONUS incentive program similar to a matching corporate 401K plan. It would begin by banks offering to match up to 20% of the additional principle payment. For example, if a borrower pays $1000.00 in additional principal above and beyond their normal monthly mortgage payment, it would look like this. Normal monthly payment $2500.00 + $1,000.00 additional principal. Once the borrower pays that additional principal payment of $1,000.00 on a mortgage with a balance of $480,000.00, the lender then deducts the $1,000.00 off the balance of the loan and additionally matches it by deducting another 20% of the principal payment, which would be $200.00. So, any additional principle would be matched by 20%. So the end result of this transaction would look like this. $480,000.00 minus $1000.00 = $479,000.00 minus the 20% of the additional principal payment ($200.00). The total amount due on the loan would then be $478,800.00. Every month that the borroer pays additional principal on their loan, the bank lowers the balance of the loan by 20% of the principal payment.
SECOND PROPOSAL:
As a result of Proposal #1, banks would NOT need an injection of equity into their balance sheets from the Federal government. They'd in a since be giving themselves an injection and they'd be saving a snowballing mortgage crisis from developing any further. This would encourage borrowers to continue paying on their existing mortgages and would discourage defaulting. Over the long haul, borrowers would be getting 20% off of their existing mortgages and lenders would receive a quick and LARGE injection of dollars from borrowers. But in return for providing this incentive to borrowers, the government would provide a substantial TAX cut to lenders. Providing these TAX cuts would encourage lenders to participate in the program. The lenders would be receiving an injection from their borrowers through additional equity payments, and the lenders would be rewarded with a Corporate TAX cut.
THIRD & LAST PROPOSAL:
Make this program good for 5 years to all borrowers. Allow borrowers who are behind on their mortgages to Reorganize in Chapter 11 Bankruptcy. Only allow participating banks to receive TAX cuts. Put a freeze on all adjustable interest rates.
To prevent further distruction of our Economy, I believe that the government needs to impliment this program IMMEDIATELY. Otherwise, borrowers are going to bring this economy to a hault by defaulting on everything from home loans, credit cards, and autos.
I don't know much about finance or the economy and I don't always pay my bills on time.
What I do know is that in 2004 I bought a house in Concord, NC. At the time I had been paying my bills religiously and so when I got approved to by a home I was plunged into the wonderful world of deciphering home mortgages. Like I said, I’m not financial wizard.
I looked for a home for a year and finally found a small house in a growing community. Over the year I talked to quite a few real estate professionals all eager to sell houses. Each one wanted to sell the most expensive house they could. It was at that time if first learned about interest only loans.
Their thinking was very compelling at the time. “Most people don’t stay in a home more than five years” I was told over and over again. “Pay interest only and after five years you sell the home and you will have the equity at your disposal to buy a bigger house.”
It seemed too good to be true. Finally the day came to decide on the mortgage with the lender which at the time was Suntrust. The seemed like good people. They were trying so hard to help me with my American dream. That is until I asked about a thirty year fixed. They looked at mye like I had three eyes. “Why would you want to do that?”
Again, I’m no Warren Buffet but at the time I remember thinking what is going too happened after five years when all these people are trying to move out of their houses so that they don’t have to actually start paying for their houses. This was easy to see coming.
So everybody has been on the take and now we are worried about how to bail them out. Apparently this is going to cost the tax payers at least $700 Billon.
So my suggestion is this. Contingent on saving Wall Street provisions should be made for Main Street. A good start would be to force lending institutions to lower existing interest rates on ordinary Americans who have been struggling to make ends meet. How much could we save the average person if interest was lowered 5-10% on outstanding balances. Consumers under the proper regulations could now afford to borrow more. The increased volume in lending should help the institutions make up from their ‘loses.’
I think this is a policy that the Obama Nation should embrace. What do you think?
