03 Mar 08 Refinance Plan Meant to Help Curb Rising Foreclosures

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The article, Mortgage crisis: Don’t forgive debt, just postpone repayment on CNNMoney.com explained some of the details for a new refinance plan meant to help curb the many foreclosures projected over the next few years. Basically, the idea is to reset the amount of a homeowner’s mortgage so that they are only making monthly payments on the current value of the home. For example, if a home was purchased 3 years ago for $300,000 and is now worth only $250,000, the homeowner’s mortgage would be adjusted so that the they only pay the monthly payment on a $250,000 home loan. This would likely save thousands, if not millions of families hundreds of dollars a month. The best part about this new plan is that every homeowner can opt to take advantage of it, even if they are current on their mortgage.

This plan would not necessarily leave the banks high and dry because the banks are still owed the money. If the homeowner sold the home a few years later, the bank would be reimbursed from the profits made from the sale of the home. For instance, if the homeowner sold the home from the example above in 10 years for $310,000, the homeowner would get $10,000, and the bank would be entitled to the remaining $50,000 as payback on the original amount of the mortgage. It basically allows the homeowner to postpone repayment on a portion of their original home loan. This plan could help many American families avoid foreclosure, and the money lost or placed on hold by the banks would likely cost them less than if the property was foreclosed on.

As a homeowner who recently purchased a new home, I stand to benefit from this plan, but what about homeowners that bought years and years ago? Other than helping the nation avoid a possible recession, this plan does little for these homeowners financially. However, in most cases, because these homeowners have equity in their homes, they are able to capitalize on the current interest rate reductions that many recent buyers miss out on because their current loan to value (LTV) ratio is too high.

The article mentioned that there are a lot of details that still need to be worked out before anything happens. As it stands right now, it’s just an idea waiting to be implemented.

How many appraisers like this plan?

Tags: cnn money, foreclosure, home loan, homeowner, loan to value, mortgage help, new homes, refinancing

23 Jan 08 Another Rate Cut Might Not Be Enough

I might be a little off here but I think we need to stop announcing that there will be further interest rate cuts every time we cut rates. This keeps people on the sidelines and away from buying or refinancing their homes. I like that we have low interest rates but am not convinced that continually trying to boost demand is the best and only solution available to us. I think we need to implement a plan to decrease the supply of homes on the market. I’ll vote for something that helps everyone out; not just new home buyers and a few home owners with enough equity in their homes to refinance.

We need a solution that decreases a home owner’s monthly bills and encourages monthly savings. I think we can do well by proposing something like a 5-year, fixed rate interest only loan that is designed to be refinanced again after 5 years. I’m not sure if this will leave banks high and dry and hurting for repayment on the principal balance but I do know that if it worked out well, we could prevent thousands of foreclosures. Decreasing foreclosures would ultimately save banks hundreds of millions of dollars and a fixed interest only loan would take investment properties off the market because investors could then hold longer.

A good way to set this loan up so that it helps homeowners out in the long run is to make the payments gradually increase starting after the first year. The payment increase can’t be drastic, something like a 1% increase per year in which the extra money each month will go into a high interest savings account. This program gives homeowners an incentive to save, and pay on time. One incentive could be an option to add more years of interest only financing; the borrower is rewarded if all payments, including the payments to a savings account, were paid on time. For example, if all payments are made on time the homeowner would qualify for 5 more years of interest only financing and if they were late on one payment they would only qualify for 4 years. Ideally, the savings account would be used to pay down the principal or could be used as a down payment on a refinance or the purchase of a new home.

There are several ways to make this work for homeowners and investors we just need banks to get creative again without getting crazy. Maybe the government could apply more tax savings for investors? Anything we do needs address both supply and demand as well as promote long term stability for the real estate market and the economy.

Tags: adjustable rate loan, arm, federal reserve, fixed rates, Home Loans, interest only loan, interest rate cuts, mortgage loans, Real Estate, refinancing