New Home Purchases Down/ Fix It and Pay It Forward ( see under item #1 )

I have been in the mortgage business and as a Realtor for many years and feel the US mortgage troubles need to be handled by someone actually in the business. When congress wrote the “Hope Program” it was supposed to help over 500,000 families, however once certain lawmakers put in added requirements ( no doubt due to lobbyist request ) it turned this program into the “No Hope” program and to date only 8 homes qualified for this help. My suggestions are below

What is The Problem

The solutions presented thus far for the mortgage crisis are all flawed in that they all include a "writing down" of the value of the troubled asset. Our 30 year fixed interest rates are determined by the free market at this time from the sale of 10 year bonds. Typically foreign investors have supported this as it has historically been a safe haven in uncertain times. If the value of US wealth is allowed to be written down further by a factor of 10% to 30% then this will make foreign investors think twice about buying this investment vehicle and our 30 year fixed interest rate could quickly and easily go to double digits furthering the crisis exponentially.

The problem that exists when you do that is that you are ignoring the chief engine of our economy for the last 10 years>> the "Rising Value of Our Homes". Since returning to an economy that supports itself without this aid will take another generation of investment and prudent policy, to ignore its main engine NOW shows a lack of understanding. I have put together a 5 point plan from the perspective of a "Financial Adviser" that will fix this crisis without writing down our personal and national wealth. From a strictly business point of view, would you invest in a "company" that told you in advance that they were writing down the value of their stock by 30% or more? The goal must be 100% occupancy of all homes. This will drive prices and American wealth back up and give you some breathing room to create new industry in clean energy.

A five-point solution

The economic/mortgage crisis goal, must be 100% occupancy of all US homes

This primary goal of 100% occupancy of all US homes, must be the goal in order to restore rising equity/wealth to US home owners. To start, a moratorium on all future foreclosures must be implemented until the problem is fixed, I believe the following five steps can help to fix the mess we're in:

We already have the infrastructure to implement this plan. It's called FHA.

1. Reform Federal Housing Administration (FHA) loans: I believe that a standard FHA loan should guarantee 30 percent instead of the 20 percent it guarantees today. Today's risk models call for the larger guarantee. So-called FHA loans are overlaid with lender requirements. This basically changes an FHA home loan from a program that's friendly to first-time homebuyers to a hybrid, conventional loan that isn't open to as many as 60% of past qualified borrowers. Under this plan, lenders that use FHA-guaranteed programs would be required to follow true FHA guidelines. This requirement by HUD to follow true FHA guidelines IF the lender is to continue to keep their FHA license will be the TEETH that seems to be lacking to free up lending. Relying on the banks to open up the waters of lending on their own has obviously proved fruitless. An FHA loan program must also be created for construction loans as there are literally no construction loan programs available at this time. There should be both an FHA construction loan program for homeowners as well as contractors where the contractor can use this program for up to 5 homes at a time.

2. Help distressed homeowners: For homeowners who are already in trouble with their mortgage but not yet in foreclosure (i.e., 30 to 90 days late), this plan would require the U.S. Department of Housing and Urban Development (HUD) and FHA to guarantee 40 percent of the mortgage. This effectively refinances the would-be foreclosures. Any FHA-approved broker or lender would be able to refinance these troubled loans, thus they get refinanced as quickly as possible.

3. Assist foreclosed-upon borrowers: Similarly, for homeowners already in foreclosure but still in their homes, HUD and FHA would guarantee 50 percent of the mortgage. When the homeowners refinance again or sell their homes, FHA would then receive an equitable exchange of value or refund from any of the homeowners' profits, starting at 50 percent for the first year and decreasing to a minimum of 25 percent after five years. The equity-sharing model would apply to the 40-percent and 50-percent guaranteed loans only.

4. Amend bankruptcy laws: Bankruptcy laws should be amended to allow all nonmortgage debt to go into fast-tracked Chapter 7 bankruptcy and to allow all such debt to be eliminated to a total debt of 12% percent of the participant’s total income, which the mortgage industry considers a manageable revolving debt load. This will help borrowers accomplish personal liquidity and keep their mortgages intact in the future. Borrowers must undergo debt counseling to take advantage of this program.

5. Buying the millions of foreclosed homes: For the millions of foreclosed homes needing homeowners, HUD & FHA will guarantee 50% of loans to families who have already been foreclosed upon. These individuals will be given a choice of only other foreclosed bank owned homes that are more affordable. The homes will be sold for full price of either the appraised value or the last loan amount which ever is greater including any fees associated with the program that helps to offset the risk of these loans (see below). All who take part in this program will have a hit to their credit the equivalent of a bankruptcy & foreclosure ( assuming they have not already filed such ). This allows for the families to take part in a mandatory credit counseling program from which they will pay for, helping them to see where they went wrong in the use of credit. This will help to stabilize the market and keep home values where they should be. American wealth and a general feeling of well being is generally expressed in the equity of their homes. All FHA licensed lenders & lenders who have excepted TARP funding will be required to participate in this program or forfeit their FHA licenses and or TARP funds.

This five-point plan will create a higher demand for the millions of homes already foreclosed upon. Due to this higher demand we likely won't have to worry about home values dropping and banks making huge write-offs that will bring further financial instability. You will also not further contribute to lower home valuations or depreciation because these special home purchases will be based on value or loan amount, which ever is greater. I believe these initiatives can fix the economic engine. When the economy is again on firm ground, these provisions can be reined in as needed.

Why this plan can work

To fix the problems in our economy, we must recognize where they originated. Although the mortgage industry has indeed contributed to them, the problem actually started about eight + years ago, when jobs started to disappear and wages went flat. Over the course of 8 years if you take into account a 3.5% inflation rate American’s spent at least 32 to 40% more year over year for the same items over that eight year period that wages stayed flat. If a spouse lost their job even for 3 months, they were then never able to catch back up.

This “shared-risk based solution” can keep the government from taking on all the risk and responsibility of failed mortgages. By sharing the risks and benefits of the risk, you could take the $700 billion bailout and expand it tenfold.

If the bleeding doesn't stop on foreclosures, then the $700 + billion infusion will look like a small down payment on the problem, and the U.S. could be headed for junk-bond status when it's looking to borrow money in the future. Not to mention having foreign investors watching our country’s wealth erode at an unprecedented pace makes future investment less likely. America’s ability to attract foreign investors to buy our 10 year bonds have kept our 30 year fixed rate mortgages at a low rate. Think of how much worse things would be if the bond market collapsed and long term interest rates ( 30 year mortgage rates ) were again in double digits.

Implementing Our Proposal

Our proposal is that HUD, show their teeth on lenders who use their FHA programs by demanding that true FHA guidelines are followed or lose their license to sell their product. Then through either FHA or even a Non Profit ( NGO ) be set up that will allow public and private sector funds from both the government ( local and or national ) and banking institutes so that this plan may be implemented immediately. The government can set up a $5,000.00 tax on all foreclosed homes applied to the lender who forecloses on the property and due and payable at foreclosure. This will create a disincentive for banks to foreclose. Then when these homes are fixed up by FHA or a non profit’s ( NGO ) oversight, the cost to fix and another $5,000.00 dollar tax will be added to the original payoff, not a ballooned payoff, and added into the price that is charged to the new buyer and financed into their new mortgage. The $10,000.00 will go into a fund that will help to offset the costs of the program and the layers of risk that HUD will be taking on. This program will create jobs and create demand for housing driving up the value of homes once again.

John Shaw is a financial strategist, author, mortgage Broker & Realtor. He has served in the mortgage, Real Estate and service sector for more than 25 years and has owned and managed his own companies during that time.. Reach him at (336) 345-9306 or john@mtgbuy.com.