Equity Redemption Bonds… an outside the box country saver?

I am a Realtor. I am very good at offering disclaimers. This post has a big disclaimer. I am not an economist, mathematician, or governmental advisor. Please read the following with the understanding that I have jumped out of the box, taken a look at what is happening and the solutions being offered and decided there might be another direction.

For those of you that have spent the last several months in a cave, let me set the stage for you. There is a crisis in the financial community. The crisis is in large part the result of rather lax lending requirements that occurred during a small window of time in our recent past. It affected mortgages, car loans, credit card debt and just about every other type of revolving debt that American consumers could acquire. We have a problem.

No surprise….bad decisions have led to bad loans. Bad loans have led to foreclosure, repossession and bankruptcy. The acknowledgement that something was awry became public knowledge as our overall cost of living began to increase.

Everybody has a plan.

Everybody, not being helped by the plan, has a problem with the plan. I might add, justifiably so. Everyone has a very personal definition of “fair and equitable”.

The first step to resolution has been taken. The problem has been identified. We have subsequently spent several months assigning blame and perceived blame on those involved. This bantering has taken our “eye off the ball” and while focused on the possible perpetrators, we have not noticed that the problem is growing like a cancer and it is poised to infect every facet of our lives.

I have an idea.

Home Equity Redemption Bonds

This is a crude example. I would let the financial whiz types put it into the proper form.

Have the feds issue bonds paying :

5 year     4%

10 year    5%

20 year    6%

The money raised would go into the Home Equity Redemption Program.

The home owners are then evaluated to determine how much they can afford to pay at a 6% 30 year fixed loan. Once that figure is determined, the home owner is allowed to receive a government backed loan for the amount qualified. The difference between the outstanding balances would be covered by funds from the Home Equity Redemption Bond Program. The original mortgages would be paid off with the proceeds of the new loan coupled with the additional funds from the Equity Bond Program. Any loan paid off in this fashion will not be subject to any pre-payment penalties. Lenders will be required to waive these penalties.

The amount of the debt created by the Equity Bond Program would increase by 1 ½% each year until the amount due is paid in full. This debt would become a permanent lien on the property.

Until the amount is paid in full, any future sale for an amount that would not result in payment of the outstanding mortgage and home equity bond debt would have to be approved by the agency charged with overseeing the Home Equity Redemption Bond Program.

Comparable sales would be reviewed and the sale will not be approved if it falls significantly below the comparables. Any portion of the Equity Redemption Bond that is not paid in the sale will transfer to the new owner in the form of a new lien on the property for the amount of the unpaid bond. This amount will continue to increase at the stated 1 ½% annually.

Investors will forfeit prepayment penalties but they will be able to reduce the amount of bad debt they are carrying. This should improve their bottom line and spur more investment.

Home owners will be able to remain in their homes at a price they can afford to pay. This will reduce the amount of foreclosures and slow down the surge in decreasing property values.

No one will reap a windfall profit, and homeowners that made a bad decision will not profit from it until such time as they can sell for more than the existing debt. This will level the playing field with those that did not make bad decisions about their mortgages.

The use of bonds will reduce the amount of taxpayer money used to effectively ameliorate the problem.

Example :

Family owns a home they purchased for $200,000

Family finds that current payment increases from $1,000 to $1,500 per month.

Evaluation determines that family can pay $1,000 per month

At 6% the family can afford a mortgage of  $166,666

The balance still remaining after paying the $166,666 is $33,334

The Home Equity Bond Program is used to pay off the $33,334

The home owner pays $1,000 per month to reduce the $166,666

The Home Equity Bond amount increases at 1 1/2 %  per year.

So, May be it can work and maybe not. I sure think something like this makes more sense. The problem in most cases, is not the total amount of mortgage that is due. It is the increase in mortgage payment amount or conditions that have reduced the amount people can pay. There is shotgun aimed at our economy. I hope something like this is adopted so the American public can dodge another bullet.

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