My proposed solution for the foreclosure problem has several parts. They include eliminating and legally banning interest only loans, mandatory loan modifications, government tax incentives to stay in a potentially foreclosed home and consumer education.
Many years ago the mortgage companies created the thirty year home loan. It seems like this extended payment plan would benefit the homeowner by allowing more time to pay for the mortgage. The payments were smaller and more affordable than those of a shorter loan. But, the long term time frame was most favorable for the corporations. The thirty year loan plan originated due to the banks theory that many buyers could possibly have financial difficulty in the period of thirty years. The lender would also benefit from the interest calculated in this long span payment plan. In thirty years the buyer pays many times the purchase price in order to own the property. And if during that length of time the home is repossessed, the company makes lots of money all over again on the same home or property. This is especially true if the home market values remain stable.
An even more amazing loan plan than the thirty year is the more recent interest only loan. After two years of straight interest payments, and pure profit for the financing company, the loan payment begins to escalate. So, the consumers dream home must be sold or refinanced in order to avoid the cost of the outrageous increasing payment to the greedy lenders. These loans helped the mortgage companies do well, but the dream home will cost more than ever dreamed if the loan is kept. For the stressed out homeowner this payment is often unaffordable and although the corporation may do well the consumer is left in dismay, and often with no remedy. Many buyers did well for awhile with these loans as long as the market values for real estate remained high and escalated. Many individuals and investors did well flipping houses, as long as there was the increasing equity to walk away with.
But, in the recent economy there are loads of homeless citizens that have walked away from the illusion that you can own a luxury home for as little as $1,000 down and be able to re-fi the disastrous doomed loan when the home values took an upside down nose dive. There is little hope for a possible sale or re-fi when the mortgage payment becomes unaffordable and the home is appraised for $150,000 less than was borrowed. The problem can easily be seen in most cities where construction has halted and homes sit vacant and empty.
So, my first remedy is to do away with interest only home loans. They have been made available for too long and should not exist. The first solution is to eliminate them and the government should make it illegal to provide them. Lenders should be policed. As great as our country is it is not perfect, as is evident with the foreclosure crisis.
Next, the mortgage companies that sold them should be legally held...