How about helping homeowners, Congress?

As the bailout plan prepares to be finalized in Congress, and the second round of TARP has just been announced by Treasury, it seems to me that there is no real relief for the initial cause of all the economic issues in the US - the housing market. I know that Treasury today announced they would make $50 billion available to help with mortgage issues, but that is no where near the help the economy really needs to turn around (IMHO that is).

Here is what I would do if I were running things:

There was an idea bouncing around Congress last week that I think had some merit. It was something similar to what I had been thinking about for some time. The plan was to allow qualified homeowners and homebuyers to obtain a 30 year fixed mortgage at 4%. The government would underwrite and guarantee a good deal of this - in fact they would pay banks some of the “lost” interest of doing a mortgate at ~1% below what the normal market rate currently is. The plan stated that it would have to be “fiscally responsible” as well - whatever that means in the time of spending trillions of dollars to try to help the country’s economy recover.

My original plan was similar, but worked more like this:

1. 1. Put a 90 day moratorium on foreclosures for homes that were originally or are currently have their mortgages serviced by banks that are participating in TARP.
   

2. 2.Banks that took bailout money (and also provided mortgages) would be allowed to sell the portion of the mortgage that reflects the actual value of the home (today’s value) to the government (as a part of TARP). This could be to Fannie or Fredie - or the new bad bank the government is talking about. The government would then lower the interest rate on this loan to 5% (now maybe 4%) for the remainder of the original loan term.
   

3. 3.The remaining portion of the loan over the actual value of the home today would have to remain at the bank, but would be lowered to a 5% (now maybe 4%) fixed rate for the remainder of the original loan term.
   

4. 4.Homeowner’s who benefit from this reduction in their interest rate can not expect it to just be a handout from the government, so they will be taxed on the difference in interest they would pay in a given year. You would take the interest “savings” and add it to your AGI - which might put the homeowner’s in a higher tax bracket. Then again, they are getting to stay in their home and are benefitting from this plan.
   

5. 5.Homeowner’s who do not benefit from this plan would be allowed to take the different between their current interest payments and what they would pay at 5% (now maybe 4%) would be able to take this as a deduction to their AGI. This would provide some equity to those who are not behind on their mortgage and did not help perpetuate the economic mess that we are in now.
   

Here is what I think this would do for the economy:

1. 1. Banks holding bad mortgages would be allowed to “stop the bleeding” on assets that have continued to go down in value. The banks, nor their shareholders, would be rewarded by receiving more money than the actual value of the home at this time, but would receive the benefit of reducing further writeoffs. The added benefit here is that they would not have to write down the value of the home during the sale because they retain the additional portion of the original loan amount. They will be made whole upon the sale of the house, or the homeowner paying the loan back completely. There is still some risk for the bank, but they bought that risk when they took the loan in the first place.
   

2. 2.As the banks gain liquidity by the sale of their so called “troubled assets” to the government, they will have the ability to lend more money. They still have to choose to do so, but they will be much better capitalized to do this lending.
   

3. 3.The government now has 5% (or 4%) return on the investment they have made in the banks now. Sure, there is some risk for the government now since they are taking assets that could in turn drop in value (which they have in the near term), but home’s typically do appreciate over time. The government has less exposure here than they do by just giving the banks the money and hoping they will choose to renegotiate their loans (which they have not done) or to lend more money (again, which they have not done).
   

4. 4.The tax consequences for this plan could be aided in part by using the money from the interest gained by the government now owning these loans.
   

For those that would still default on their loans under this proposal, they may not have been in the correct home for them to begin with (or maybe they have lost their jobs as well).

I’m not an economist, but I think a plan like this works on several levels to help increase credit in the overall marketplace as well as providing actual help to struggling homeowners.

A 2% solution brought to you by Bamf.