On (Global) Financial Meltdown, Part 2
Why the hell doesn't this plan explicitly help out homeowners directly? Why?
It's really simple: keep people from defaulting on their loans. Unfortunately the implementation would be tricky, but it's the only way to keep this thing from getting worse.
1) Allow homeowners to refinance their mortgages. If you have an ARM, you get to move to a 30 year fixed loan at the current rate. The records should probably also be adjusted to treat it as if it had been one from the get-go, so that rates already charged above the current 30-year rate would go to the principal instead. I understand that the money for the interest charged is probably already gone. Isn't it possible to let the bank (or whoever now owns the loan) to take the hit and recoup that over time with the more reasonable terms? Or does the government pay the difference as a loan to the financial institution, and make them pay THAT back at a reasonable rate? Then they (hopefully) have less incentive to foreclose.
That's the point of the ARM and the high-risk loans -- charge a ridiculous interest rate upfront with the expectation that a certain percentage will default. The "risk" was lowered because they got more money out of them in a shorter period of time than the safer loans. Another way of looking at that is they didn't ever expect those people to make it through the full term, and wanted to get as much cash out of them as possible. Unfortunately that disgusting strategy only works when the market is healthy and they can expect to re-sell the house.
But this can't be decided on a case-by-case basis. Everyone who has an ARM with a percentage above the 30-year rate should be eligible. All they have to do is go to their financial institution, fill out some Federal assistance form, and whomever is in charge of things on the government's end takes care of the logistics. This won't stop everyone from defaulting, but it should reduce the number who do.
2) What about the people who have already defaulted? I want to think that they can make it back into their houses, but that's unlikely. Some might have been able to get new ones (doubtful, if their credit tanked). The houses might have already been sold, so the previous owners can't go back and continue like nothing happened. But there might be people for which it's not too late, and they should be "un-defaulted".
3) There should be some freeze period for defaulting on loans until this is sorted out. It's clearly not in a bank's best interest to foreclose on a home right now -- banks will soon be sitting on an inventory of nearly 1.2 million homes (up from 440k last year, and from 220k or so in 2005... I think), and they are DESPERATE to unload them. That's not good. If any of these families have a chance of refinancing, they should be allowed the time to take it. It's still going to be a loss for the companies in question, but it won't be as big.
In the mean time, these institutions still need to have some liquidity. Maybe part of the existing plan still has to occur as it stands to make that happen. But we need to be attacking the problem from both sides.
~Sean
It's really simple: keep people from defaulting on their loans. Unfortunately the implementation would be tricky, but it's the only way to keep this thing from getting worse.
1) Allow homeowners to refinance their mortgages. If you have an ARM, you get to move to a 30 year fixed loan at the current rate. The records should probably also be adjusted to treat it as if it had been one from the get-go, so that rates already charged above the current 30-year rate would go to the principal instead. I understand that the money for the interest charged is probably already gone. Isn't it possible to let the bank (or whoever now owns the loan) to take the hit and recoup that over time with the more reasonable terms? Or does the government pay the difference as a loan to the financial institution, and make them pay THAT back at a reasonable rate? Then they (hopefully) have less incentive to foreclose.
That's the point of the ARM and the high-risk loans -- charge a ridiculous interest rate upfront with the expectation that a certain percentage will default. The "risk" was lowered because they got more money out of them in a shorter period of time than the safer loans. Another way of looking at that is they didn't ever expect those people to make it through the full term, and wanted to get as much cash out of them as possible. Unfortunately that disgusting strategy only works when the market is healthy and they can expect to re-sell the house.
But this can't be decided on a case-by-case basis. Everyone who has an ARM with a percentage above the 30-year rate should be eligible. All they have to do is go to their financial institution, fill out some Federal assistance form, and whomever is in charge of things on the government's end takes care of the logistics. This won't stop everyone from defaulting, but it should reduce the number who do.
2) What about the people who have already defaulted? I want to think that they can make it back into their houses, but that's unlikely. Some might have been able to get new ones (doubtful, if their credit tanked). The houses might have already been sold, so the previous owners can't go back and continue like nothing happened. But there might be people for which it's not too late, and they should be "un-defaulted".
3) There should be some freeze period for defaulting on loans until this is sorted out. It's clearly not in a bank's best interest to foreclose on a home right now -- banks will soon be sitting on an inventory of nearly 1.2 million homes (up from 440k last year, and from 220k or so in 2005... I think), and they are DESPERATE to unload them. That's not good. If any of these families have a chance of refinancing, they should be allowed the time to take it. It's still going to be a loss for the companies in question, but it won't be as big.
In the mean time, these institutions still need to have some liquidity. Maybe part of the existing plan still has to occur as it stands to make that happen. But we need to be attacking the problem from both sides.
~Sean