Martin Feldstein penned an opinion article in the Friday, 7 March Wall Street Journal proposing another solution to help with the mortgage crisis. As we've discussed in other threads, there are a couple of factors contributing to the present "crisis."
- Most of the high-risk mortgages have been securitized, so there's no longer a bank involved which cna negotiate with the borrower (to extend the terms of the loan, lower the payments, even forgive debt, etc) in order to keep the home"owner" in the house.
- Because of the high loan-to-vale ratio of the original mortgages and the present slide in the value of many of these homes, the homeowners will soon have negative equity. Thus,no reason to stay in the house (except the considerable ding on their credit).
Feldstein proposes a new government loan program. The govt would sell bonds, and use the money to fund 15 yr loans worth 20% of the mortgage value. The homeowners would take out the loans (at very favorable rates, only slightly higher than the bonds issued to fund them) and the funds would go to the mortgage holder to pay down the mortgages a lot and reducing their principal and interest payments by 20%. The homeowner's monthly payments stay about the same, but the amount of interest they would pay would be cut appreciably. Unlike a conventional mortgage, these would be "recourse" loans, and the person taking the loan out would be subject to having other assets/pay seized in order to make the payments. There would be no new govt bureaucracy--the present mortgage servicing agency would also collect the payments for the new loans
Result: Homeowner now has equity in the home, is less likely to abandon it. This will help avoid an erosion in property values in nearby homes, and the value of the mortgage backed securities would go up considerably.
As much as I dislike the idea of more govt involvement in the present situation, this has the virtue of at least avoiding a direct bailout. I also wonder if there might not be a mechanism for Uncle Sam to recover part of the admin costs through a fee to holders of the underlying mortgage-backed securities (since they will directly benefit as their relatively risky bonds increase in quality). Finally, I wonder if many homeowners would take this deal. Sure, they'll save on interest, but they'll give up the "right" to walk away from their homes loss-free if it reaches a negative equity situation. As Feldstein points out, this loan would not be attractive to those who are already in a negative equity situation, but the vast majority of homeowners aren't there--yet.
- Most of the high-risk mortgages have been securitized, so there's no longer a bank involved which cna negotiate with the borrower (to extend the terms of the loan, lower the payments, even forgive debt, etc) in order to keep the home"owner" in the house.
- Because of the high loan-to-vale ratio of the original mortgages and the present slide in the value of many of these homes, the homeowners will soon have negative equity. Thus,no reason to stay in the house (except the considerable ding on their credit).
Feldstein proposes a new government loan program. The govt would sell bonds, and use the money to fund 15 yr loans worth 20% of the mortgage value. The homeowners would take out the loans (at very favorable rates, only slightly higher than the bonds issued to fund them) and the funds would go to the mortgage holder to pay down the mortgages a lot and reducing their principal and interest payments by 20%. The homeowner's monthly payments stay about the same, but the amount of interest they would pay would be cut appreciably. Unlike a conventional mortgage, these would be "recourse" loans, and the person taking the loan out would be subject to having other assets/pay seized in order to make the payments. There would be no new govt bureaucracy--the present mortgage servicing agency would also collect the payments for the new loans
Result: Homeowner now has equity in the home, is less likely to abandon it. This will help avoid an erosion in property values in nearby homes, and the value of the mortgage backed securities would go up considerably.
As much as I dislike the idea of more govt involvement in the present situation, this has the virtue of at least avoiding a direct bailout. I also wonder if there might not be a mechanism for Uncle Sam to recover part of the admin costs through a fee to holders of the underlying mortgage-backed securities (since they will directly benefit as their relatively risky bonds increase in quality). Finally, I wonder if many homeowners would take this deal. Sure, they'll save on interest, but they'll give up the "right" to walk away from their homes loss-free if it reaches a negative equity situation. As Feldstein points out, this loan would not be attractive to those who are already in a negative equity situation, but the vast majority of homeowners aren't there--yet.
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But I heard of a survey that was conducted a while back where something like 50% of americans really did believe that the govt has their "own" money. And they did not understand the whole concept of the govt's money is really "your" money.
