Another Approach to $700 Billion Bailout
Peter Miller, author of the Common-Sense Mortgage, has offered up some alternatives to the proposed $700 billion bailout plan. Below are excerpts from an article he wrote about these alternatives.
"One alternative is to simply offer low-interest loans to borrowers who currently have toxic mortgages.
"Figures developed by Rick Sharga, senior vice president at RealtyTrac, show that the likely cost of low interest loans would be roughly $220 billion — hardly cheap, but a lot less expensive than the $700 billion plan now being discussed in Washington.
"Sharga's figures look like this:
"Some 2.5 million homes are likely to be in the "process of foreclosure" during the coming 12 to 18 months. If a typical home has an average sale price of about $220,000 (many homes now facing foreclosure were financed several years ago with two loans, thus first loans are often significantly less than current market values), and if the average mortgage is $176,000 (80 percent of market values) then the total value of such mortgages would be $440 billion. If the refinancing program was limited to half of the homeowners who will probably lose their homes to foreclosure, Uncle Sam would need to provide loans worth $220 billion.
"(Another) alternative idea works like this: Instead of replacing loans, give lenders an amount equal to 15 percent of the mortgage principal in exchange for concessions. In other words, current loans would stay in place, there would be no principal reductions and lenders would not be forced to sell their paper in the midst of a declining market.
"Imagine if the average cost to modify a loan — that is, reduce the interest rate to something fixed for 30 years with no reduction in principal — was 15 percent of the loan amount or $26,400 ($176,000 x 0.15). Lenders accepting this money now would have to modify each current mortgage to a fixed rate established by Uncle Sam as well as a renewed 30-year term.
"Borrowers in this scenario would be required to share future appreciation 50/50 with Uncle Sam until the entire $26,400 was paid back at the time of sale. If a property was sold and the entire amount was not repaid, the borrower would be required to pay $500 a year until the debt was fully paid off. In effect, the pay-off system would resemble the concept approved over the summer for first-time home buyers, a system which provides a $7,500 tax credit up front that must be repaid when the property is sold."
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