I have always believed that that the borrower has the burden of determining whether they can afford a home mortgage. Most borrowers in the United States don’t know the meaning of the word budget, and the result is the lenders become the bad guys. Murray Eckell’s commentary establishes that he puts the blame on lenders more so than the borrowers.
His solution is to give irresponsible borrowers a 40% discount on their loans while keeping the same interest rates. What a deal for people who could not afford the loan to begin with! The solution proposed by Murray is an administrative nightmare and rewards high risk borrowers who should have rented a few more years while saving some money.
Borrowers who obtain ARM(Adjustable Rate Mortgages) are, by definition, high risk and should not be bailed out by taxpayers. I think any level headed Pennsylvanian would concur.
It is time to look at an entirely different approach to the mortgage foreclosure debacle.(What is real cause of this debacle Murray?) The federal government throws billions of dollars at various problems to bail out the problem creators, but it rarely, if ever, directly invests for a specific return on its investment.
I suggest it is time to look at an investment. This idea assumes that most of the mortgagors were financially able to pay the mortgage obligation at the initial rate before the variable rate increases kicked in.
If so, why not have the federal government buy all those mortgages from the lenders at a substantial discount, say 60 percent of the loan paid in full in cash immediately, and assigns the entire loan to the government. The borrower repays the loan to Uncle Sam at the initial interest rate over the term of the loan. Uncle Sam realizes an investment return of 40 percent plus the initial variable rate of interest over the term of the loan.
The following hypothetical shows how it works. Husband and Wife (H&W) borrow $100,000 from Bank (B) at a variable rate starting at 4.5 percent payable over 20 years with the rate increasing to 8.5 percent.
H&W can handle 4.5 percent but as it increases to 8.5 they can not and face foreclosure.
Uncle Sam steps in and buys the loan from B for $60,000 which be gets immediately in full satisfaction for the $100,000 loan. B assigns the loan to Uncle Sam. Uncle Sam allows H&W to repay Uncle Sam over 20 years at 4.5 percent with no rate increase. Everybody wins. Although B gets $60,000 not $100,000, it gets it immediately no foreclosure expenses and no issues of selling the house in a down market. H&W benefit with a low interest rate for 20 years plus $40,000 plus 4.5 percent.
The only downside(Really, the ONLY downside!) to the idea is the administrative complications and costs plus the validity of the basic assumptions. However, I would like to see this idea debated. It is so simple, it could work.
MURRAY S. ECKELL