Congress failed to require real, true, viable loan modification in the Housing & Economic Recovery Act as well as EESA and again in the ARRA. "We the People" have now spent or committed to spent some $2 Trillion, with trillions more to come, all without ever having addressed the root cause of this crisis.... the real estate defaults and foreclosures. In addition, proper loan modification WILL eliminate the vast majority of loan defaults that have brought about the massive increase in bankruptcy filings. Should our bankruptcy judges have the authority to modify real estate loans… most probably the answer is yes, however this is and ought to be a separate issue apart from the current economic crisis.
It has been stated that some 58% of loans that have been modified to date are back in default and foreclosure. A review of these loans will reveal that the cause for these failures has been the method of modification... the rate and terms applied in these instances have been a prescription for failure. Therefore, I suggest that congress require that any lender, brokerage, insurance company, or and any other firm that has received TARP or other federal funds, either directly or indirectly; and holds a beneficial interest in an any loan secured by 1-4 unit real estate, either directly or indirectly, be required to offer to modify all real estate loans with less than 3 years remaining to the next rate adjustment along the following lines:
WITHOUT the time consuming, meaningless process of (effectively) re-qualifying for a new loan, the existing loan balance is to be modified into a 50 year amortized loan, with a 5 year reset and an initial rate of 4%. The maximum rate change each 5 years would be +/- 2%; with a 9% lifetime cap. Loans already in default would carry a forbearance agreement added as part of the process.
This method of modification will reduce the loan payment by some 55%; while at the same time preserving the amount due to the lender. The aggregated annual savings of in excess of $150 Billion realized would, most likely, go into savings, pay down revolving debt or be spent fueling the economy through the purchase of goods and services (cars?). All of these options are positive and necessary for a cure to this crisis.
In most instances, this process would eliminate the urge to simply walk away from a property in which the homeowner has no equity. They require a home for their family; and what is better than the one that they already have. This proposal will stabilize not only the real estate and financial markets... but also the lives of these millions of Americans... while at the same time providing the knowledge and hope that, given time, they will regain the lost equity in their homes... the hope and positive attitude that my proposal brings to the table cannot be overlooked.
It is quite easy to verify that the number of families currently effected by this crisis is not, as reported 13 million, but more likely over 25 million real estate loans are in jeopardy... we cannot continue to ignore these people... as to stay on the present course, impacts every American family negatively.
Every time a homes sells as an REO or "Short Sale" the real estate tax base is reduced... the states and local governments are all reeling from these loses. This plan will put an end to this hemorrhage in tax revenue too.