The solution to the foreclosure crisis requires cooperation among the borrower, the mortgage lender, and the federal government. Current proposals by President Obama’s administration call for federal government intervention through interest rate subsidies for refinancing stressed mortgages, guarantees of mortgage-backed securities buyouts, and funding to fill gaps in reduced monthly payments as an incentive for lenders to work with borrowers in restructuring mortgages. My plan differs radically from these proposals by more realistically evaluating lender losses in restructuring loans and shifting more of the long term fiscal burden onto the borrower and reducing the cost to the federal government. At the same time, my solution will work hand-in-hand with current proposals. This presentation of my proposed solution to the mortgage crisis addresses the implementation of the plan in reference to a single mortgage loan in distress.
Assume a case in which a married couple (the Smiths) purchased a home in April, 2007 for a purchase price of $250,000.00. The Smiths put $12,500.00 down and financed the balance of the purchase price through a 30 year adjustable rate loan, with an initial interest rate of 4.50%. The Smiths currently owe a principle balance of $225,000.00. The property is currently worth $140,000.00.
For two years, the Smiths faithfully made their mortgage payments. In the spring of 2009, Mrs. Smith was laid off. She has been unable to find another job. At about the same time of Mrs. Smith’s layoff, Mr. Smith’s employer cut Mr. Smith’s salary by 15%. To make matters worse, in April, 2009, the lender adjusted the interest rate on the Smith’s mortgage to 10%. The Smiths have been unable to make their mortgage payments since June, 2009. They are currently six months in default. The Smiths desire to stay in their home. The lender prefers to avoid taking ownership of the property and incurring a substantial loss. But, foreclosure and filing of bankruptcy by the Smiths is imminent.
Through step one of my plan, the lender will be required by the federal government to make a good faith attempt to negotiate modified payment terms with the Smiths. This may require a downward adjustment of the interest rate, an extension of the term of the note, rolling interest owed into the principle balance, and even a possible reduction in the principle balance. The negotiation will be influenced by and entered into with full knowledge by the Smiths and the lender of the other elements of the plan. The goal of the negotiations will be to reduce the Smith’s monthly payment to an amount they can afford and to narrow the loss that will be incurred by the lender.
Upon the Smiths and the lender successfully negotiating modified terms, the lender will be left with a loss in the amount of the difference between the present value of the renegotiated loan terms and the present value of the original loan terms. This loss will likely be substantially less than the...