Vanessa and I got together with our good friends Steph and Ron last night for dinner and conversation. We had tacos and I went for the green salsa thinking it would be the milder, more flavorful option. Don’t know how I missed “habanero” printed across the label, but between attempts to put the fire out with more Guinness, we got to talking about another hot topic – the mortgage crisis. I’m sure we’re not the only ones talking about it, either. Between stories about rich guys who’ve run their companies into the ground asking for handouts, you might still catch a little something about the actual root of the matter. Ron threw out an idea that I think is so good, I would really like to know why the geniuses in Washington haven’t mentioned anything like it.
Ron’s Idea: Leave their balances where they are, convert the adjustable rate mortgages to conventional, fixed rate products, grant them the lowest possible interest rate, and provide them with an additional ten years to pay the loan off.
1. The Balances. Would it be fair to relieve those who cannot meet their financial obligations of a portion of their debt without also offering this relief to those who made responsible, long term investments, and who have been perfectly able to make their payments on time throughout this crisis? They agreed the house was worth that much at closing, so let the balance stand. The lender is repaid in full and all borrowers are treated fairly.
2. The Products. Variable rate products led to rising monthly payments, meaning people couldn’t actually afford these homes that they couldn’t afford. This led to people putting homes up for sale, nobody having money to buy, and banks foreclosing – nasty business. A switch to fixed rate products should make the payments a bit easier to manage. Again, lender is paid and borrowers keep their homes.
3. The Rate. They’re talking about a 4.5% interest rate in the news lately, but they don’t want to offer it to people looking to refinance. Why not? Aren’t these the people facing foreclosure? I can understand trying to encourage people to buy houses, but taking someone in trouble out of an oppressive ARM and dropping them into a fixed rate mortgage at 4.5% seems like it would do a pretty good job of reducing those monthly payments. Lenders still make money on the loans and borrowers see relief through reduced monthly payments.
4. The Term. Give an extra ten years to pay. Lenders realize greater returns through reduced interest collected over a longer term and borrowers enjoy further payment relief. There could be real potential for equity again.
I am a far cry from being an expert on home loans and finance, but this sounds like a solid, long term solution to the problem. There’s got to be something I’m missing, though, if it’s not even been mentioned yet. Seriously. People didn’t buy homes they couldn’t afford if they didn’t actually like the house. Keeping them obliged to repay the original amounts encourages them to remain in those houses for a while to build some equity in them. Even though the interest rate is reduced, the term is longer, meaning there is more profit for the lender. Reducing the monthly payments by providing homeowners with an excellent, fixed rate mortgage that allows them an extra ten years to pay for the home gives them a chance to get some of that equity back and feel good about being a homeowner again.
Someone tell me why this can’t work.