Diane M.

Big Stocks Under a Buck

I recently read that the gov’t is thinking of stepping in an forcing interest rates on new home loans to drop to 4.5% … this got me a bit angry. This penalizes those who “played by the rules” and bought homes they could afford and fixed rates either before the bubble or after the bubble began to burst and go downhill.

Moreover, if all the bailout money is going to the banks, but the banks are failing to do the right thing, maybe a re-think is needed as to the interventions required to turn this economy around?

Assume there are about 60 million homes owned in the U.S. (I’m not sure as to the exact number). Assume that of these, 40 million are the primary residence of an owner (i.e., not a second home, beach house, etc.)

What if instead of bailing out the banks, which are aren’t willing to lend it to new homebuyers, for fear of a negative equity spiral, the gov’t stepped in and made loans at 0% interest for all primary residences sufficient to cover the next 1-2 years of mortgage payments associated with those homes.

For those homes showing signs where the owners had trouble making payments, the gov’t works with them to start a savings plan that allows them to use this “grace period” to catch-up on their payments – and at the same time the gov’t actively works with the bank to find a better payment amount the owners can afford by extending the length of the loan (say, from 30 years to 40 years) in return for a loan interest rate.

The government money would eventually have to be repaid by the owners, but at smaller amounts over a longer period.

Moreover, for those who “played by the rules” they could use this grace period on their home loans either to (1) continue to make their own mortgage payments to return the loan principal – effectively benefitting them, and/or (2) buy some consumer goods to stimulate the economy with money they would have used for their mortgage payments.

Of course, the amount loaned at 0% as a “grace period” on home mortgages would need to be proportional to when the home was bought and how much the home was bought for, but making a grace-period for 1-2 years at 0%, eventually payable say in 10-15 years (whereupon if it’s not paid, then the rate started to go up) wouldn’t penalize anyone and would offset those homes that have negative equity.

The gov’t has an obligation to avoid moral hazards. Don’t penalize those who played by the rules before, during, and after the bubble… find a solution that helps both those that needs help and allows those who played by the rules to not be punished but, in fact, contribute to the economy rebound.

Thoughts?

Fannie, Freddie and the 4.5% Mortgage Myth

I recently read that the gov’t is thinking of stepping in an forcing interest rates on new home loans to drop to 4.5% … this got me a bit angry. This penalizes those who “played by the rules” and bought homes they could afford and fixed rates either before the bubble or after the bubble began to burst and go downhill.

Moreover, if all the bailout money is going to the banks, but the banks are failing to do the right thing, maybe a re-think is needed as to the interventions required to turn this economy around?

Assume there are about 60 million homes owned in the U.S. (I’m not sure as to the exact number). Assume that of these, 40 million are the primary residence of an owner (i.e., not a second home, beach house, etc.)

What if instead of bailing out the banks, which are aren’t willing to lend it to new homebuyers, for fear of a negative equity spiral, the gov’t stepped in and made loans at 0% interest for all primary residences sufficient to cover the next 1-2 years of mortgage payments associated with those homes.

For those homes showing signs where the owners had trouble making payments, the gov’t works with them to start a savings plan that allows them to use this “grace period” to catch-up on their payments – and at the same time the gov’t actively works with the bank to find a better payment amount the owners can afford by extending the length of the loan (say, from 30 years to 40 years) in return for a loan interest rate.

The government money would eventually have to be repaid by the owners, but at smaller amounts over a longer period.

Moreover, for those who “played by the rules” they could use this grace period on their home loans either to (1) continue to make their own mortgage payments to return the loan principal – effectively benefitting them, and/or (2) buy some consumer goods to stimulate the economy with money they would have used for their mortgage payments.

Of course, the amount loaned at 0% as a “grace period” on home mortgages would need to be proportional to when the home was bought and how much the home was bought for, but making a grace-period for 1-2 years at 0%, eventually payable say in 10-15 years (whereupon if it’s not paid, then the rate started to go up) wouldn’t penalize anyone and would offset those homes that have negative equity.

The gov’t has an obligation to avoid moral hazards. Don’t penalize those who played by the rules before, during, and after the bubble… find a solution that helps both those that needs help and allows those who played by the rules to not be punished but, in fact, contribute to the economy rebound.

Thoughts?