The Mortgage Crisis

Mortgage foreclosures are at an all time high. Citigroup has just announced that it will go along with allowing judges to re-write mortgages in cases of foreclosures brought on by bankruptcy filings. We have an epidemic of falling home prices all over the country. So what can we make of all of this?
Those people with mortgages taken out with 20% down, and 80% financed have seen the values of their homes decline 20-30 and even 40% in the last year or so. This means that there is no longer any equity in their home, but the mortgage payment remains the same.
Traditional fixed rate mortgages have dropped from the high 6’s to the low 5% range, and predicted to go even lower. But who can afford to refinance when their equity has been wiped out?
Courts may save some people who have given up and declared for bankruptcy. One court this week rewrote one debtor’s mortgage to about 60% of the original amount and at a very attractive low rate. But – this was done for a debtor who had two investment properties! Investment properties? How about the poor homeowners (there are 59,000,000 mortgages outstanding in this country) who didn’t speculate on investment properties, but just kept paying on their own mortgage? Shouldn’t the Government be thinking seriously of what they could do to help this huge group of people?
An extremely interesting idea has recently been floated about rescuing the American Home Owner. Basically this idea calls for the Government to dictate that all 59,000,000 mortgages would be rewritten. They suggest that the new interest rate would be set at 1.5% for 30 years, and the amount of the mortgage would be determined by an independent appraisal based on the current value of the property.
What would happen under this novel approach would be to lower the typical mortgage payment (P&I) by about 50%! (A $1400 monthly payment on a $200,000 mortgage would be reduced to about $700, thereby freeing up $700 per month for the homeowner to spend in other ways!
It is true that current mortgage holders would take a substantial loss to their portfolio, but overall this would be a lesser loss than that taken when an owner walks away from a house, or files for bankruptcy, or allows his property to go to the foreclosure jackals.
With the additional money available to these 59 million households there would be an instant financial stimulus created with millions of people having a lot of spendable income to spur the economy. With that boost in place, everyone, including renters, people who own their homes outright, people living at home – everyone – would benefit with more people working, more people spending, more jobs, and more good things for everyone.
With home prices stabilized, foreclosures would return to their normal miniscule levels, jobs will be created to provide the goods and services created by the increased spending and the recession/depression or whatever you want to call the mess we are in would be no more.
Government tax revenues would be enhanced because (1) the interest deduction will automatically be smaller which will create a somewhat greater tax burden. But there will be significantly more sales and income taxes collected from all the money that has been freed up, and from the jobs created by this pent up demand.
This entire plan was laid out in a full page ad in USA TODAY on page 11A of the December 9, 2008 edition. I urge all of you to look at this page, and perhaps go into the author’s blog at RemortgageAmerica.blogspot.com. The person who contributed this article was Dennis F. Paulaha, Ph.D. Economics at d.paulaha.com.