Does US Economy Need A Stimulus Mortgage With the economy faltering because of a lack of consumer and investor confidence a stimulus is needed to include the consumer in the economic recovery.
When the financial crisis occurred in September 2008 the Fed and Treasury helped the economy by using the TARP money to stop the economy from collapsing. The financial section of the economy is now in much better condition. It is Main Street that is now in need of a shot in the arm to get well. It can be done without costing the taxpayer any money.
To stimulate the economy we need to change the terms of our mortgages so Fannie Mae and Freddie Mac and other government agencies can buy and securitize mortgages at lower beginning interest rates.
Banks and financial institutions are not able to loan homeowners money to refinance their homes, for new mortgages. or make a loan modification, when home prices are decreasing. If a 30 yr. adjustable rate mortgage was created with a starting interest rate (3% to 3.5%) to jolt the economy back to life, the toxic securities will become valuable again as home prices stabilize and then appreciate.
The interest rate on these new mortgages should increase one-quarter percent per year and cap out at the currant market rate of 5%. To decrease defaults on mortgages, the borrower would have to qualify at the 5% interest rate to obtain the loan. These new mortgages should not be tied to any index.
We are currently trying to capitalize the banks by infusing money directly into them. This policy is wrong because the collateral is losing value. As the value of the collateral decreases the banks need more capital to stay viable. The value of the collateral must be stabilized first, for the banks and investors to be confident enough to lend money against it.
What will this stimulus mortgage do for the economy? When the homeowner refinances their home from a 6% mortgage interest rate to a 3% interest rate their monthly interest payment will decrease by 50%. A $1500.00 monthly mortgage interest payment will decrease to $750.00. That will be like the person receiving a $750.00 stimulus check each month for the first year and thereafter a little less each year for the next seven years. Multiply this by millions of people and you will have a stimulus plan that puts the purchasing power were it should be, with the people. The foreclosed property inventory would be quickly sold and housing prices would stabilize. Loaning money to banks does not create demand in the economy, people do!
If mortgage interest rates were available at a starting rate of 3 or 3.5% and the borrower was qualified at a 5% interest rate, the chance of a foreclosure would be close to zero. The eight years it would take for the interest rate to rise to 5% would allow the economy to heal. Business activity would increase; this would increase the value of commercial properties reducing the coming crisis in that area of the economy. With home values stabilized investors will be willing to invest in mortgage securities again rather than treasuries. With the mortgage interest rate increasing every year, the investor will know that their rate of return will increase for the next seven years unlike treasuries.
Mortgage interest rates historically have been about 100% above the inflation rate for the last 30 yrs. With inflation at 0% and home prices deflating, mortgage interest rates for the last year have been about 5 to 6% that means they are 500% to 600% above the inflation rate!
With the enactment of the Zero Inflation Taxation Policy this will help control inflation and inflation psychology which will maintain the lowest possible interest rate and the chance of another housing bubble would be near zero. Low interest rates will help maintain the value of the mortgage securities. (Go to web site to read about this policy change and its benefits.)
Banks and investors should be encouraged to modify the underwater mortgages by changing the tax code so that it would be beneficial to them and the borrower when the excess amount of the mortgage is reduced.
For those people who own a home that the mortgage is greater than the currant selling price, a clause should be included in the refinanced mortgage that states, the bank will discount the mortgage, an amount equal to 20% of the monthly payment, each month, for a maximum of ten years, or until the selling price of the house plus repairs equals the amount of the mortgage, if the borrower agrees to continue to pay on the unpaid balance due. This policy would allow for an orderly decrease in mortgage balances that are above the selling price of the home.