Optometrists label 20/30 as imperfect vision, but soon, financial advisors will see 20/30 as the perfect vision for solving the worst home foreclosure crisis since The Great Depression. For obvious reasons, those on the verge of foreclosure are suffering; however, foreclosures negatively impact other parties as well. They cause major harm to surrounding neighborhoods and businesses, bring about additional foreclosures, and decrease home prices. The relocation of families severs community bonds and damages businesses. As such, the economy of a given neighborhood weakens, potentially leading to even more foreclosures. Furthermore, foreclosures increase the supply of homes, which, in turn, decreases home prices. In fact, one foreclosure can lead to approximately $5,000 of property value depreciation on its eighty closest neighbors (US Congress, 4). Given this reality, I propose the 20/30 plan as the solution.
Unlike most other markets, foreclosures are not self-correcting in the classical sense; according to Wharton finance and real estate professor Susan Wachter, the foreclosure situation is “reinforcing” (Wharton, 3). This is because in a classic case, excess supply causes prices to drop, thus slowing down production to the point where eventually demand exceeds supply. At that point, prices start to increase until the market finds equilibrium. However, in the foreclosure crisis, the excess supply (i.e. foreclosures) does cause a decrease in home prices, but this does not slow down the supply which would be the case in a classic situation. As a result of this, home prices continuously decrease, and it takes longer than usual for the market to find equilibrium. For this reason, immediate government legislation becomes even more vital.
To reduce the reinforcing effect of foreclosures and to ultimately reverse the current foreclosure crisis, I propose the 20/30 plan:
1. Replace the balance of the current loan with a new loan: the current fair market value of the home minus 20%.
2. The homeowner is free to look for the new loan at the prevailing fixed rate of interest at either 15- or 30-year amortization.
3. The difference between the balance of the original loan and the current loan must be written off by the lending institutions. Not only is this law a necessary component of this plan, but it is also a fair way for the lending institutions to come to terms with this crisis that they are mostly responsible for.
4. The new monthly mortgage plus monthly property tax should not exceed 30% of the homeowner’s monthly income. If the homeowner fails to meet this standard, then the government will loan money as a first mortgage at a fixed rate of interest that he is expected to pay back within five years. In an effort to reduce government spending, Obama’s Homeowner and Stability plan, costing 275 billion dollars, must cover this aspect of the 20/30 plan.
As an example, Joe and his wife Margie purchased a home at the height of...