Thursday, March 05, 2009
$75 Billion Mortgage Rescue? There Is A Better Plan
The new mortgage plan may help to extend repayment period, reduce rates or even result in some reduction in the outstanding mortgage. We can argue till the cows come home, but its a band aid.
I am disappointed that there is a complementary solution staring them in the face and no one is doing it! If you are throwing $75 billion to save those in trouble, what about those who are not in "need" - you can be fairer and at the same tackle the issue better.
My plan, use $50 billion for the above plan, and use another $50 billion to spur the demand side. The problem with falling property prices is not just foreclosures and negative equity, its also the other side of the equation - the demand. The other $50 billion should be used to give out $25,000 max for every new buyer who qualify (really qualify) - i.e. verified income, verified affordability according to the textbook on approving loans, with a minimum down payment of 15%.
The $25,000 will be credited to the pay down the mortgage once a year over 3 years, it will reduce the new owner's monthly payments every year for 3 years. New owners will get up to $25,000 or a max of 10% of the price purchased. As these are new mortgages, they should have a low fixed rate of 1.5% plus BLR or a max rate of 4% for the first 5 years. Not only will you get fresh genuine demand but these new loans are more defensible and of a better quality thus underpinning the buyers' strength. This brings an immediate balance to the equation, fresh demand, fresh buyers. Hey, even if you already own two houses but if you qualify, you can buy.
$50,000,000,000 divided by $25,000 = 2 million new buyers.
The expectation of genuine buyers flowing in will re-energise the markets. Somebody please pass this to Tim Geithner!
p/s photo: Ha Ji Won