Underwater Mortgages Resolved Without Excessively Inflating Asset And Primary Home Prices

New Mortgage Terms and Tax Policies Help Reduces Unemployment and Foreclosures

The Federal Government has failed to develop a viable national plan to resolve the underwater mortgage problem nationally.
For years the Federal Reserve has been using monetary policies to maintain low interest rates to help revive the economy.  Monetary policies alone cannot provide our economy with a sustainable recovery.  Government deficit spending policies have not fully revived the economy either.  For the Main St. economy to benefit from the long term low interest rates the Federal Reserve has created with its monetary policies, better mortgage terms, and the correct principal reduction plan for underwater mortgages are needed.  To jolt the economy back to life we need to increase aggregate demand. Our economy also needs a change in our taxation policies to have a sustainable recovery.
The Federal Reserve has been using quantitative easing to create long term low interest rates, which, used by itself, will re-inflate housing prices, which is currently occurring in the housing market, and eventually cause interest rates to rise, which will cause another recession.
We can have a sustainable economic recovery by creating a mortgage with a lower starting interest rate, and then a fixed interest rate for the remaining term of the mortgage.  We can also maintain lower long term interest rates with a change in our tax code as explained later.  The Fed’s monetary policies should not be the only tool we use to control inflation, and to stimulate the economy. https://wp.me/p42WQA-7c
I am sure the Fed would agree that an infusion of confidence, and purchasing power into the middle class will go a long way in obtaining their goal of lowering the unemployment rate, and price stability.  We have all the necessary institutions in place to help the Fed make it happen, if we fully utilize these institutions.
The backbone of any modern consumption economy is its middle-income population.  If they are financially strong, the economy will be strong, and the government will have the revenue to pay its debt and current expenditures.  70% of the economic activity in our economy relies on the consumer.  It is consumer demand that drives increases in employment, and productive investment.
The financial sector needs to adopt a mortgage, with new terms that are more appealing to investors than the 10 year US Treasury Note, to provide people with a mortgage with a lower starting mortgage interest rate, and then a long-term fixed interest rate. The Home Owners Loan Corporation, (HOLC) a federal agency, created new mortgage terms  in the 1930s by adopting the thirty year fixed interest rate mortgage, and a principal reduction plan to help improve the economy, and reduce unemployment.  We need to do the same thing now!  A monthly principal reduction plan needs to be put in place for all underwater mortgages to reduce strategic abandonment, to quicken the balancing of the primary home market, and to hasten an economic recovery.
A mortgage-backed security (MBS) needs to be created that the interest rate increases each year until the interest rate equals the thirty year fixed rate mortgage interest rate, or a little above it.  A guaranteed annual increase in the interest rate is something a 10 year US Treasury Note doesn’t have.  If the mortgages are securitized by Fannie Mae or Freddie Mac, the Mortgage Backed Security should be guaranteed by the full faith and credit of the federal government, similar to US Treasury notes and bonds, after certain conditions are met, as explained later.  Mortgages that are collateralized with less than 10% equity should be insured, if possible, with a mortgage payment insurance policy, rather than mortgage insurance, to guarantee payment of the payment each month if the homeowner is unable to make the payment. We should also consider a combination of the two types of insurance to insure the mortgage.
To improve Main Street’s economy and reduce unemployment, people’s monthly disposable income, and confidence needs to improve, to increase aggregate demand. By restructuring, or refinancing almost all primary home mortgages.  With the correct mortgage terms people’s purchasing power would be increased on Main St., which would speed-up economic recovery without increasing the money supply.  Increasing the money supply, without increasing the supply of products and services, debases the currency, which leads to higher prices.
How the “Plan” increases people’s monthly disposable income and confidence, to increase aggregate demand, is by making available, to all qualified homeowners, and home buyers, a mortgage with new terms. The primary home buyers, and those homeowners that want to refinance need terms that they can succeed at, unlike the previous mortgages that created the collapse of our economy, and the collapse of most of the world’s economies.
The risk of default of the new mortgage is near zero, because the borrower would qualify at the highest rate of interest the mortgage interest rate would rise to, which would be the 30 years fixed rate mortgage interest rate, or a little above it. The two types of mortgage insurance would also decrease the possibility of the taxpayers losing any money, after the mortgage originator has assumed the first 10% of the losses of a defaulted mortgage.
The new mortgage terms would be similar to other mortgages that are available to home owners, and home buyers It starts out at a low-interest rate, but, and this is important, the Ascending Interest Rate Mortgage is not indexed after a few years. as the current 5/1 Adjustable Rate Mortgage is. The lower starting interest rate would allow the homeowner the time needed to build equity, establish their household, and begin a family. The stronger the family is the stronger our economy is.
Do we want a nation of renters, or do we want people involved in our capitalist system? Do we want people, and families that are solidly tied to the neighborhood?  The mortgage terms I am proposing would encourage home ownership for qualified people, and stability for our economy.
If it is profitable for the financial sector to offer the 5/1 ARM that maintains interest rates at 2.75% for 5 year, and the 15 year fixed interest rate mortgage at about 3%, the mortgage originators should be able to offer the following mortgage terms without any lost to their profit margin.
What mortgage terms should be offered to the public, to improve the primary home market, reduce foreclosures, and unemployment, with the 10 year US Treasury Note yielding about 2% and with the Fed rate at .25%?
The Ascending Interest Rate Mortgage has a starting interest rate of around 2.75% or lower, based on the ten-year US Treasury Note. Currently the 10 year Treasury Note is about 2%. That would make the interest rate for the first year lower than 2.75%. The interest rate would increase .25% per year, unlike a Treasury Note which has no increase in the interest rate during its term. The interest rate would stop increasing at 5%, which will take 9 years to obtain, or at the 30 year fixed rate mortgage interest rate, or a little higher, whichever is lower.
Underwater mortgage principal reduction should be done on a monthly basis based on 33.33% of the interest and principal monthly payment. If a person was making a $1500.00 monthly P&I mortgage payment, an additional $500.00 principal amount would be subtracted from the underwater mortgage each month, for a total of $6000.00 a year. For a total, if warranted, of $60,000.00 maximum over a ten year period. This policy would encourage people to stay in their homes, and continue to make their mortgage payments.  It would give them hope that their mortgage would, sooner than later, equal the sale price of their home, without re-inflating primary home prices. Primary home prices rising too fast, based on wage increases, fraud, and an over leveraged financial sector is what created the financial crisis.  We do not want to repeat history. We need to re-balance our economy, reduce the debt overhang, and change tax policy to have a sustainable economic recovery. wp.me/p42WQA-1E
There is no lost in purchasing power of the mortgage investor’s invested money if the unpaid principal amount is reduced 6% in one year, or the price of primary homes increase 6% in one year. With the Fed’s very low interest rate policy, created with it purchasing mortgage backed securities and government debt, mortgage investors are losing a greater amount of purchasing power, because, in the last couple years, primary home prices have increased an average of more than 20%, in some markets, in one year.
As the economy improves the Ascending Interest Rate Mortgage will decrease people’s purchasing power with a .25% higher interest rate each year to help prevent too much aggregate demand from being created, which would help create another cycle of inflation, or a primary home price bubble.
The new mortgage terms would only be available to owners, or buyers of owner occupied homes. The home buyers, or the homeowner will embrace the new mortgage terms, because they will know what their housing cost will be for years to come. With predictability comes confidence in taking on the responsibly of a mortgage. They will also prefer the AIR Mortgage over the 30 year fixed rate mortgage, because of the lower starting interest rate. A simple letter of modification stating the old terms, and the new terms is all that is needed to modify those mortgages that have remained current, and are held in Fannie and Freddie’s portfolio of mortgages. Because of low starting interest rate, the risk of default, or foreclosure would be drastically reduced.
I believe investors would embrace the new terms, because of the reduced risk of default, and the reduced interest rate change risk as outlined later in the new taxation policy I am proposing.
With the AIR Mortgage available, more homes will be sold and refinanced. The AIR Mortgage will increase economic activity in the primary home sector, which will help the primary home market, and the economy to improve. The foreclosure rate should decrease. The foreclosure inventory would be quickly sold to owner occupied home buyers. The primary home market will stabilize, and then home values will slowly increase 1 to 2% a year if the “Plan” is fully implemented.
For the AIR Mortgage to become available, Fannie Mae and Freddie Mac, and other government home financing agencies will need to offer to purchase the mortgage from the banks, and other mortgage originators, before the banks and mortgage brokers will offer the new mortgage terms to the public. If the Fed agrees that they will purchase the AIR Mortgage securities from Fannie Mae and Freddie Mac, and other housing agencies, there is no reason for F&F, and other government housing financing agencies not to offer the AIR Mortgage to the public.
The Director of the FHFA, Mr. Mel Watt, needs to be replaced if he fails to allow F&F to purchase the AIR Mortgage, and use the monthly principal reduction procedure to quicken the restructuring of, and the stabilization of F&F’s mortgage portfolios.
We should take Fannie and Freddie out of conservator-ship and use them to improve the economy, and the primary housing market. We made a mistake when we allowed the government to privatize Fannie Mae. Fannie Mae and Freddie Mac should be foreclosed upon, and then used for the public benefit, as they were originally created for, instead of for profit.
With the housing market improving, and F&F earning more money than it is costing to operate F&F, we will be able to repay the 160 billion F&F have borrowed from the US Treasury. When HOLC was shut down in the 1950s, it returned the excess funds it had collected, after all the mortgages they held were paid off, back to the US Treasury.
If the restructuring, mortgage monthly principal reduction, and refinancing of the mortgages is done quickly, and the housing market and the unemployment rate begin to improve, we may be able to let the Bush Tax Cuts expire, without creating a recession, because of the increase in aggregate demand the new mortgage terms will create with an increase in disposable income on Main Street.
Investors will invest in the AIR Mortgage securities, because the securities will increase in value as the annual interest rate increases .25% a year, unlike the 10 yr. treasury note, and other fixed rate debt instruments, which will decrease in value, as interest rates increase. Also the Ascending Interest Rate Mortgages that are securitized in the MBS would have a near zero default rate, because of the lower starting interest rate.
Banks and mortgage brokers do not hold all the mortgages they originate. They sell most of them to investors, or they are securitized into Mortgage Backed Securities (MBSs). If investors don’t see the value in the AIR Mortgage security, the Fed should sell the mortgage securities they are holding with higher interest rates, because they will become more valuable when the new mortgage terms are made available. The Fed would then hold the new AIR Mortgage securities until their interest rate increases to the 30 year fixed interest rate. The Fed would then sell the mortgages to investors.
The “Plan” would be more efficient if it was adopted nationally, because F&F would be able to offer the lowest possible interest rates, but a State, or county could adopt the Plan by selling bonds, and then using the money to purchase the underwater mortgages at fair market value from investors and banks, and then restructure the mortgages as outlined in the Plan.
Purchasing the underwater mortgages may not be necessary.  Investors will want to stay invested in the mortgages after they accept the new terms, and the monthly principal reduction plan, because of the benefits this plan has over a full principal reduction of the underwater mortgage to market value, or an eminent domain procedure or foreclosure.
The monthly principal reduction plan can be thought of as an appreciation sharing plan, because the mortgage is not reduced to the current sale value of the home, but to a value that equals the unpaid balance of the mortgage in the future after the home appreciates to the reduced mortgage amount, which is being reduced monthly for a maximum of 10 yrs., or until the sale price of the home, and mortgage are the same monetary amount.
The other possibility would be to create a State, regional, or a county wide bank that would have access to the Fed’s discount window to borrow the funds to start the mortgage restructuring. North Dakota has a state bank. California is considering a state bank, and has created a study group to take a closer look at the benefits, and pitfalls of having a state bank. North Dakota’s economy is doing very good with a 4.5% unemployment rate, and a normal foreclosure rate.
It is very possible, that because the underwater mortgage’s unpaid balance will be reduced monthly, under the terms of the Plan, that the total return on investment will be much more than the spread between the cost of funds, and the interest rate the homeowners will be paying, if the underwater mortgages are purchased at market value. The increase in return on investment occurs, because of the increase in a home’s value  will have over a few years, using the Plan. The mortgage may have only been reduced by a small percentage, using the monthly principal reduction procedure, when the underwater mortgage equals the resale value of the home, if compared to a full discount to the market value of the home, when the mortgage is restructured. This makes the mortgage more valuable for resale purposes. Not only would the investor be collecting interest on a larger principal balance, the investor will receive a larger principal pay off when the loan is paid off, or the home is sold. The homeowner will be paying a lower interest rate on a larger principal amount, but the monthly payment will be much lower than their current monthly payment. The mortgage principal and interest payment may be reduced 50% if the current interest rate of the mortgage is 100% higher than the starting interest rate of the new Air Mortgage. If the homeowner is paying $1500.00 P&I per month, the P&I payment on the new Air Mortgage will be $750.00.
When a recession occurs in an economy, interest rates decrease. To increase demand on Main St., to reduce the length, and depth of the recession, or financial crisis, all single family home mortgages should include a clause that lowers the interest rate, as the Federal Reserve lowers interest rates to the financial sector. This change will eliminate refinancing cost, and increase economic activity, and aggregate demand on Main St. rather than primarily increasing economic activity in the financial sector, increasing it’s profits, and bonuses. As the economy improves, the Fed will increase the cost of funds to the financial sector, the interest rate should then increase slowly until it rises to the interest rate of the 30 year fix rate interest rate, or the prior interest rate the mortgage interest rate was at prior to the interest rate being lowered, which ever is the lowest interest rate.
As I mentioned earlier: You can think of the monthly principal reduction procedure as a future equity sharing plan. Therefore the mortgage could be readily sold to FHA, or private investment funds after the mortgage has been restructured.
The county or cities tax base would also be maintained at a higher value if home values are not decreased. When the homeowner sells the home in the future the home should sell for a higher price if surrounding homes have not been decreased in price.
The new mortgage should be able to be assumed by a qualified buyer to increase mobility of the current homeowner, so they will be able to find work in other areas of the country. Having the AIR Mortgage assumable would also assure a continuation of mortgage payments.
The primary single unit home market should be composed of people wanting a home to live in. In this way they will not be competing with investors for a home to live in. Investors have many multi- unit housing opportunities to invest in. All tax deductible expenses should be eliminated from the tax code for investors in single unit family homes. If homeowners are given the tax deduction, that investors now have, to repair their homes, they will buy the homes that need repairs, and fix them up, there-by stabilizing and improving neighborhoods. Single family home prices would be based on the purchasing power of the people that want to live in the home. Not the greater purchasing power of investors.
The private financial sector, Fannie and Freddie and the other government housing financing agencies could save millions of dollars by preventing millions of unnecessary foreclosures by adopting the AIR Mortgage terms, with monthly principal reduction, to restructure most of the underwater mortgages they hold in their portfolios. The financial sector, and F&F would win the support of millions of families if they succeeded in this endeavor.
Our economy would be on a defined road to recovery. The deficit would decrease as employment improved.
The People’s Economic Recovery Plan presents a better procedure to dispose of the underwater mortgage situation, and create a more productive and stable economy, without costing the taxpayers a dime. Please read the Plan to learn all the benefits of a monthly principal reduction program, and the 2% Appreciation/Inflation Taxation Policy. Go to http://www.taxpolicyusa.wordpress.com/  for more information!
Chris Hall is an author, real estate investor, and retired small businessman.

Plan first written 12/1/2008 since then it has been updated
Copyright 12/1/2008

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